Deck 8: Consolidated Tax Returns

Question 1

A calendar year parent corporation wants to file its tax returns on a consolidated basis with its affiliates. The group's election to file consolidated Federal corporate income tax returns must be made by the extended due date of the first return on which the consolidation is applied .

Answer 1

True

Question 2

A consolidated Federal income tax return may be the product of a merger of the affiliates, or of a stock-for-assets takeover.

Answer 2

True

Question 3

For consolidated tax return purposes, purchased goodwill is amortized as a deduction to taxable income over 15 years. Under financial accounting rules, 40-year amortization is allowed.

Answer 3

False

Question 4

Campbell Corporation left the Crane consolidated tax return group after the calendar 2014 tax year. Generally, Crane can add Campbell back to the consolidated group, but no earlier than for the 2020 tax year.

Question 5

A tax-exempt charitable trust, created by a U.S. C corporation, can join in a Federal consolidated return.

Question 6

The calendar year Sterling Group files its Federal corporate income tax return on a consolidated basis. The group's Form 1120 is due on March 15, or September 15 if an extended due date is approved by the IRS.

Question 7

After a takeover, the parent's balance sheet shows a fair market value cost basis in the subsidiary, for both book and tax purposes.

Question 8

A limited partnership can join the parent's consolidated group for book and for tax purposes.

Question 9

A subsidiary corporation must leave the consolidated group if it is restructured as an LLC.

Question 10

When the parent acquires 51% of a subsidiary U.S. corporation, the subsidiary can join the consolidated financial statements and the consolidated tax return of the parent.

Question 11

Business reasons, and not tax incentives, constitute the primary motivation for most corporations to form a conglomerate and file tax and financial accounting reports on a consolidated basis.

Question 12

Giant Ltd. owns 100% of the stock of Middle Corporation. BottomCorp is owned 60% by Giant and 40% by Middle. Giant's Federal consolidated income tax return includes both Middle and Bottom.

Question 13

A consolidated Federal income tax group must meet the eligibility requirements of the Regulations on the first day of the first year for which the election to consolidate is effective, and then on the last day of every succeeding tax year.

Question 14

Most of the Federal consolidated income tax return rules are found in detailed sections of the tax Regulations.

Question 15

A Federal consolidated group can claim a dividends received deduction for payments that the parent receives from other affiliates.

Question 16

The right to file on a consolidated basis is available to a group of corporations when they constitute a "parent-subsidiary affiliated group."

Question 17

A joint venture, taxed like a partnership, can join in a consolidated Federal income tax return.

Question 18

The rules for computing Federal consolidated taxable income are some of the most complex in the tax law.

Question 19

The consolidated return rules are designed to allow a tax-neutral means by which to elect to file on a consolidated basis.

Question 20

A corporation organized in Germany and wholly owned by the U.S. parent can be included in a Federal consolidated return.

Question 21

In computing consolidated taxable income, the domestic production activities deduction (DPAD) is removed from the taxable incomes of the group members and determined on a group basis.

Question 22

In computing consolidated taxable income, capital gains and losses are removed from the taxable incomes of the group members and determined on a group basis.

Question 23

When a subsidiary sells to the parent some business-use property that has appreciated from its $20,000 basis to a $50,000 fair market value, the subsidiary immediately recognizes $30,000 ordinary income on the consolidated return.

Question 24

With the filing of its first consolidated return, the parent corporation of a Federal consolidated group makes an irrevocable election as to how the group will allocate a tax year's income tax liability among the group members.

Question 25

A Federal consolidated tax return group can apply the "relative taxable income" method as a means to apportion the tax liabilities of the members among the affiliates.

Question 26

When a consolidated NOL is generated, each affiliate is allocated a share of the loss.

Question 27

In computing consolidated E & P, a negative adjustment is allowed for the group's disallowed travel and entertainment expenditures.

Question 28

All affiliates joining in a newly formed consolidated return must consent to the election on Form 1122, as attached to the Form 1120 for the group.

Question 29

In computing consolidated E & P, dividends paid to the parent by group members are subtracted.

Question 30

Lacking elections to the contrary, Federal consolidated NOLs are carried back two years and then forward twenty years.

Question 31

Each of the members of a Federal consolidated tax return group can claim its own $40,000 AMT exemption, subject to phase-out.

Question 32

Consolidated group members each must use the same tax year end, and all of the members must use the same tax accounting methods (e.g., LIFO or FIFO).

Question 33

Keep Corporation joined an affiliated group by merger in 2016. The group generated a consolidated 2016 NOL, and Keep's share of the loss was $50,000. Lacking an election by the parent to the contrary, Keep can carry the loss back to its separate 2014 return, and the parent can claim a tax refund.

Question 34

Consolidated group members each are jointly and severally liable for the entire consolidated income tax liability.

Question 35

If subsidiary stock is redeemed or sold outside the group when an excess loss account exists, the selling parent corporation recognizes ordinary income equal to the account balance.

Question 36

The starting point in computing consolidated taxable income is the sum of the separate Federal taxable income amounts of the affiliated group members.

Question 37

When the net accumulated taxable losses of a subsidiary exceed the parent's acquisition price, the parent's basis in the subsidiary's stock becomes negative.

Question 38

An example of an intercompany transaction is the use of the trademarks of the parent corporation by a subsidiary for an arm's length licensing fee.

Question 39

In computing consolidated taxable income, compensation amounts are removed from the taxable incomes of the group members and determined on a group basis.

Question 40

Keep Corporation joined an affiliated group by merger in 2010. The group generated a 2016 consolidated NOL, and Keep's share of the loss was $50,000. Keep's share of the loss is included in the group's NOL carryforward to 2017.

Question 41

The foreign tax credit of a consolidated group can be greater than the sum of the credits of the group members when filing separately.

Question 42

Which of the following entities is eligible to file Federal income tax returns on a consolidated basis?

A) Professional sports team operating as a limited partnership.
B) Japanese corporation engaged in multinational operations, including two-thirds of its activities in the U.S.
C) Japanese corporation engaged in multinational operations, including one-third of its activities in the U.S.
D) U.S. corporation engaged in the nuclear energy industry.

Question 43

A Federal consolidated filing group aggregates its separate charitable contributions for the tax year, deductions for which then are subject to an annual limitation of 10% of consolidated taxable income.

Question 44

Which of the following potentially is a disadvantage of electing to file a Federal corporate income tax consolidated return?

A) Increased deduction amounts when computations are made on a group basis.
B) Deferral of gains realized in transactions between group members.
C) Increased basis in the stock of a subsidiary that generates annual taxable income.
D) Additional administrative costs in complying with the election.

Question 45

Conformity among the members of a consolidated group must be implemented for which of the following tax items?

A) Use of foreign tax payments (i.e., as a credit or deduction).
B) Tax accounting method (i.e., cash or accrual).
C) Inventory accounting method (e.g., FIFO or dollar-cost averaging).
D) Tax year-end.

Question 46

How must the IRS collect the liability for Federal taxes from among a consolidated group?

A) Against the parent of the group.
B) According to the members' current internal tax-sharing agreement.
C) Against the member of the group that generated the tax.
D) No particular order of collection is prescribed by IRS rules.

Question 47

Which of the following entities is eligible to join in a Federal consolidated return?

A) A sole proprietor with annual sales of more than $50 million.
B) A U.S. corporation's § 401(k) plan.
C) A partnership organized in Germany.
D) A corporation that operates in seven different U.S. states.

Question 48

Cooper Corporation joined the Duck consolidated Federal income tax return group, when Cooper held a $1 million NOL carryforward. In its first year as a part of the Duck group, Cooper generated a $150,000 taxable loss. For that year, Duck cannot deduct any of Cooper's NOL in computing consolidated taxable income.

Question 49

The losses of a consolidated group member are subject to both the SRLY rules and a § 382 limitation. When both limitations apply, the § 382 restrictions override the SRLY rules for this affiliate.

Question 50

Cooper Corporation joined the Duck consolidated Federal income tax return group, when Cooper held a $1 million NOL carryforward. In its first year as a part of the Duck group, Cooper generated a $150,000 operating profit. For that year, Duck can deduct only $150,000 of Cooper's NOL in computing consolidated taxable income.

Question 51

How are the members of a Federal consolidated group affected by computations related to E & P?

A) Each member keeps its own E & P account.
B) E & P is computed solely on a consolidated basis.
C) Members' E & P balances are frozen as long as the consolidation election is in place.
D) Consolidated E & P is computed as the sum of the E & P balances of each of the group members, computed on the last day of the tax year.

Question 52

Which of the following is not a requirement that must be met before a group files a consolidated return?

A) None of the corporations can be ineligible under the Code to file on a consolidated basis with the others.
B) All of the corporations must be members of an affiliated group.
C) The group members must share the same inventory accounting method.
D) The group members must share a common tax year end.

Question 53

Which of the following tax effects becomes more restrictive if an election is made to file a group's Federal corporate income tax returns on a consolidated basis?

A) Choice of members' tax accounting methods
B) Use of the lower tax rate brackets.
C) Use of the $40,000 AMT exemption.
D) Members who are liable for the consolidated tax liability.

Question 54

A penalty can be assessed by the IRS if the parent corporation does not keep good records to support the computation of a subsidiary's stock basis.

Question 55

Which of the following entities is eligible to file Federal income tax returns on a consolidated basis?

A) A U.S. C corporation that files on a separate basis for its state income tax returns.
B) The charitable foundation of a U.S. C corporation.
C) The liquidating trust of a U.S. C corporation.
D) A wholly owned French subsidiary of a U.S. C corporation.

Question 56

How do the members of a Federal consolidated group split among themselves the benefits of the lower tax brackets on the first $75,000 of taxable income?

A) According to their relative net asset holdings.
B) According to an internal tax-sharing agreement.
C) According to an internal tax-sharing agreement, which may be modified by the IRS upon audit.
D) According to a tax-sharing agreement that must be approved by the IRS by the end of the first quarter of the tax year.

Question 57

Which of the following is not generally a disadvantage of filing Federal corporate income tax returns on a consolidated basis?

A) Net capital losses from one affiliate can offset the capital gains from another. This can reduce the tax liabilities of the group as a whole.
B) Realized losses from transactions between affiliates are not recognized immediately.
C) Compliance costs usually are higher when a consolidation election is in effect.
D) The election generally is binding for future tax years.

Question 58

When a member departs from a consolidated group, it leaves behind any NOLs that it generated while in the group. The parent corporation and remaining affiliates apply those NOLs against future consolidated taxable income.

Question 59

The Rack, Spill, and Ton Corporations file Federal income tax returns on a consolidated basis. The group's tax return currently is under audit. Under a valid tax-sharing agreement, each corporation is liable for one-third of the group's consolidated tax liability. The affiliates have agreed with the auditor that the group's unpaid liability for the year is $90,000. Because of an incorrect tax return position, another $3,000 in interest and an $18,000 penalty is attributable solely to Ton.
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At present, only Rack is solvent and has the cash with which to make such a tax payment. What is the maximum amount for which the government could be successful in forcing Rack to satisfy the outstanding liabilities of the consolidated group?

A) $0
B) $90,000
C) $93,000
D) $108,000
E) $111,000

Question 60

Which of the following potentially is a disadvantage of electing to file a Federal consolidated corporate income tax return?

A) The consolidated ACE adjustment could be reduced for the filing group.
B) The taxation of intercompany dividends is not eliminated. Recognition of losses from certain intercompany transactions is deferred.
C) The tax basis of investments in the stock of subsidiaries is unaffected by members contributing to consolidated taxable income.
D) The § 1231 loss of one member is not offset against the § 1231 gain of another member of the group.

Question 61

ParentCo purchased 100% of SubCo's stock on January 1, 2014, and the companies have filed consolidated returns since then. Taxable income computations for the members include the following. Neither group member incurred any capital gain or loss transactions during these years, nor did they make any charitable contributions. The 2015 net operating loss:

A) may be carried back to offset SubCo's 2013 taxable income.
B) may be carried forward only and applied against group income if so elected by ParentCo.
C) cannot be carried back against 2013 SubCo income, as consolidated returns were not filed.
D) either a or b, but not both.

Question 62

The Maestro consolidated group reported the following taxable income amounts. Parent owns all of the stock of both Junior and Minor. Determine the net operating loss (NOL) that is apportioned to Parent.

A) $360,000.
B) $400,000.
C) $500,000.
D) $900,000. All NOLs of a consolidated group are apportioned to the parent.

Question 63

ParentCo and SubCo had the following items of income and deduction for the current year. Compute ParentCo and SubCo's consolidated taxable income or loss.

A) $81,000
B) $88,000
C) $90,000
D) $90,500

Question 64

Calendar year ParentCo acquired all of the stock of SubCo on January 1, 2013, for $1,000,000. The parties immediately elected to file consolidated income tax returns. SubCo generated taxable income of $250,000 for 2013 and paid a dividend of $100,000 to ParentCo. In 2014, SubCo generated an operating loss of $350,000, and in 2015 it produced taxable income of $750,000. As of the last day of 2015, what was ParentCo's basis in the stock of SubCo?

A) $1,650,000
B) $1,550,000
C) $1,000,000
D) $0

Question 65

The Nanie consolidated group reported the following taxable income amounts. Parent owns all of the stock of both Junior and Minor. Determine the net operating loss (NOL) that is apportioned to Minor.

A) $100,000.
B) $300,000.
C) $0. Minor did not report an NOL of its own.
D) $0. All NOLs of a consolidated group are apportioned to the parent.

Question 66

ParentCo and SubOne have filed consolidated returns since 2012. SubTwo was formed in 2014 through an asset spin-off from ParentCo. SubTwo has joined in the filing of consolidated returns since then. Taxable income computations for the members include the following. None of the group members incurred any capital gain or loss transactions during these years, nor did they make any charitable contributions. If ParentCo does not elect to forgo the carryback of the 2015 net operating loss, how much of the 2015 consolidated net operating loss is carried back to offset prior years' income?

A) $80,000
B) $40,000
C) $30,000
D) $0

Question 67

The consolidated net operating loss of the Parent Group includes all of the following except:

A) Parent's operating income/loss.
B) Parent's charitable contributions.
C) Parent's dividends received deduction.
D) Subsidiary's operating income/loss.

Question 68

Which of the following statements is true with regard to intercompany transactions?

A) An intercompany transaction is eliminated from consolidated taxable income.
B) All intercompany gains are recognized, but losses must be deferred.
C) A cash sale of a business asset by the purchasing member to an acquirer outside of the group triggers immediate recognition of the gain or loss.
D) The gain or loss on an intercompany transaction is deferred for up to ten years, after which it is recognized.

Question 69

ParentCo purchased all of the stock of ChildCo on January 2, 2015, and the two companies filed consolidated returns for 2015 and thereafter. Both entities were incorporated in 2014. Taxable income computations for the members include the following. Neither group member incurred any capital gain or loss transactions during these years, nor did they make any charitable contributions. No § 382 limit applies. To what extent can ChildCo's 2014 losses be used by the group in 2017?

A) $135,000
B) $125,000
C) $75,000
D) $10,000
E) $0

Question 70

ParentCo and SubCo have filed consolidated returns since both entities were incorporated in 2012. Taxable income computations for the members include the following. Neither group member incurred any capital gain or loss transactions during these years, nor did they make any charitable contributions. The 2014 consolidated loss:

A) must be carried forward, unless an election to forgo carryforward is made by the parent.
B) must be carried back, unless an election to forgo the carryback is made by the parent.
C) can be used only to offset SubCo's future income.
D) cannot be used to offset any of ParentCo's 2012 income.

Question 71

Calendar year ParentCo purchased all of the stock of SubCo on January 1, 2013, for $500,000. SubCo produced a loss for 2013 of $150,000 and distributed cash of $25,000 to ParentCo. In 2014, SubCo generated a loss of $450,000; in 2015, it recognized net income of $90,000. What is ParentCo's capital gain or (loss) if it sells all of its SubCo stock to a nongroup member on January 1, 2016, for $150,000?

A) $185,000
B) $150,000
C) ($35,000)
D) ($535,000)
E) All gain/loss is ordinary when subsidiary stock is sold.

Question 72

ParentCo and SubCo had the following items of income and deduction for the current year. Compute ParentCo and SubCo's taxable income or loss computed on a separate basis.
ParentCo SubCo

A) $85,000 $5,000
B) $85,000 $3,000
C) $85,500 $5,000
D) $85,500 $3,000
E) None of the above.

Question 73

The Nannerl consolidated group reported the following taxable income amounts. Parent owns all of the stock of both Junior and Minor. Determine the net operating loss (NOL) that is apportioned to Junior.

A) $500,000.
B) $540,000.
C) $600,000.
D) $0. All NOLs of a consolidated group are apportioned to the parent.

Question 74

Which of the following items is not computed on a consolidated basis?

A) Dividends received deduction.
B) Cost recovery deduction.
C) Charitable contributions.
D) Net capital losses.

Question 75

ParentCo owned 100% of SubCo for the entire year. ParentCo uses the accrual method of tax accounting, whereas SubCo uses the cash method. During the year, SubCo sold raw materials to ParentCo for $35,000 under a contract that requires no payment to SubCo until the following year.
Exclusive of this transaction, ParentCo had income for the year of $30,000, and SubCo had income of $50,000. The group's consolidated taxable income for the year was:

A) $165,000.
B) $150,000.
C) $115,000.
D) $80,000.

Question 76

ParentCo and SubCo had the following items of income and deduction for the current year. Compute ParentCo and SubCo's taxable income or loss computed on a separate basis.
ParentCo SubCo

A) $81,000 $21,000
B) $81,000 $22,000
C) $70,000 $22,000
D) $70,000 $21,000

Question 77

The Harris consolidated group reports a net operating loss (NOL) for the year. The tax law works to:

A) Allow unused charitable contributions a 20-year carryforward.
B) Disallow any carrybacks of NOL deductions.
C) Keep the consolidated group from benefiting when the election to consolidate is motivated chiefly by tax reduction strategies.
D) All of the above statements describe effects of the consolidated return rules.

Question 78

ParentCo, SubOne and SubTwo have filed consolidated returns since 2014. All of the entities were incorporated in 2013. Taxable income computations for the members include the following. None of the group members incurred any capital gain or loss transactions during these years, nor did they make any charitable contributions. How should the 2015 consolidated net operating loss be apportioned among the group members?
ParentCo SubOne SubTwo

A) $80,000 $ 0 $ 0
B) $ 0 $60,000 $40,000
C) $ 0 $40,000 $40,000
D) $ 0 $48,000 $32,000

Question 79

ParentCo owned 100% of SubCo for the entire year, and both companies use the accrual method of tax accounting. During the year, SubCo purchased $20,000 of supplies from ParentCo. In addition, SubCo provided internal audit services to ParentCo, which were worth $40,000. Including these transactions, ParentCo's separate taxable income was $75,000, and SubCo's separate taxable income was $100,000. What is the group's consolidated taxable income for the year?

A) $215,000
B) $195,000
C) $175,000
D) $155,000

Question 80

ParentCo purchased all of the stock of ChildCo on January 2, 2015, and the two companies filed consolidated returns for 2015 and thereafter. Both entities were incorporated in 2014. Taxable income computations for the members include the following. Neither group member incurred any capital gain or loss transactions during these years, nor did they make any charitable contributions. No § 382 limit applies. Assuming that no election is made to forgo the carryback, to what extent are ChildCo's 2014 losses used by the group in 2015-2017?

A) $100,000
B) $95,000
C) $75,000
D) $0