Deck 8: Consolidated Tax Returns

Question 1

For the first two years that a group files a consolidated tax return, it may make estimated payments on either a consolidated or separate return basis.

Answer 1

True

Question 2

In computing the separate taxable income of an affiliated group, intercompany dividends are included in the calculation.

Answer 2

False

Question 3

An excess loss account is provided for by the Regulations and records deductions in excess of basis until such time as the excess deductions are recovered.Dispositions can include a sale, a redemption, or a subsidiary's stock becoming worthless.

Answer 3

True

Question 4

The "lonely parent rule" allows a parent corporation to utilize its losses from a pre-affiliation return year to offset consolidated taxable income of the current affiliated year.

Question 5

Any gains or losses on an intercompany transaction are deferred, and recognized only when realized outside of the affiliated group.

Question 6

The consolidated return regulations are interpretive regulations, and therefore do not have the force and effect of statutory law.

Question 7

An advantage of consolidated returns is that intercompany profits on the sale of goods and services may be deferred until later years.

Question 8

Perhaps the most important advantage of a consolidated return is that the net operating losses of one group member can be used currently to offset the taxable income of another member.It is only when the sum of the separate NOLs exceeds the sum of the separate taxable incomes that a consolidated NOL results.The consolidated NOL may be carried back or forward.

Question 9

Distributions (dividends, redemptions, or liquidations) between members and dispositions of member obligations (or bad debts with respect to such obligations) are considered intercompany transactions.

Question 10

Income or loss from changes in accounting methods must be specially accounted for in intercompany transactions in determining the "separate taxable income" of each member of the affiliated group.

Question 11

After a group elects to file a consolidated tax return, it may shift back to separate returns in a later year if there is unanimous consent among members of the group.

Question 12

The consolidated regulations inhibit the acquisition of a corporation that contains assets with a fair market value less than basis.

Question 13

According to the Regulations, a consolidated tax return must be filed on the basis of the common parent's tax year.

Question 14

During the initial year that a group elects to file a consolidated tax return, it may, prior to the extended due date of the return, revoke its election and file separate tax returns.

Question 15

An advantage of consolidated returns is that losses of a subsidiary that reduce the tax liability of the group also decrease the parent's tax basis in the subsidiary.

Question 16

A loss for which a separate return was filed may in some circumstances be carried forward to a consolidated return year without regard to any loss limitations in later years.

Question 17

In 2011, a parent may elect to include a subsidiary as a member of the group from the beginning of the taxable year if it was acquired within the first 30 days of the taxable year.

Question 18

Each subsidiary of an affiliated group must adopt the parent's accounting period for the first taxable year that its income is included in the consolidated return.

Question 19

A parent corporation may not change its taxable year to that of its subsidiaries without obtaining advance permission from the Commissioner.

Question 20

Gains or losses on assets acquired in "deferred intercompany transactions" will not be partially recognized when the purchasing member of the group begins depreciating that asset.

Question 21

In the consolidated tax formula, which of the following is not eliminated from combined taxable income to arrive at consolidated taxable income?

A)Dividends-received deductions
B)Intercompany profits in inventory
C)Capital gains and losses
D)Disallowed built-in deductions
E)Charitable contribution deductions

Question 22

If affiliated member M sells an asset with a cost of $20,000 to affiliated member N for $23,000, what is N's basis in the asset?

A)$0
B)$3,000
C)$14,000
D)$20,000
E)$23,000

Question 23

Which of the following is not considered an advantage of filing a consolidated tax return?

A)Losses of an affiliate may be offset against profits of other members of the group.
B)The election is binding and can be discontinued only with the Commissioner's permission.
C)Intercompany dividends between group members are eliminated from income.
D)The basis in the stock of a subsidiary is increased by earnings and profits accumulated during consolidated return years.
E)All of the above are advantages of filing a consolidated tax return.

Question 24

X and its subsidiary B file a consolidated tax return for 2012.During the year, B distributes $15,000 cash to X.X's basis in its B stock is $9,000, and B has current earning and profits for its first year of $6,000.For 2012, no gain is recognized.How much will go to an excess loss account?

A)$0
B)$1,000
C)$6,000
D)$10,000
E)$15,000

Question 25

If P, S, and T file a consolidated tax return on a calendar year basis, and P sells the stock of S on October 1, then:

A)S must file a separate return for the period of Jan.1-Oct.1.
B)T must file a separate return for the period of Oct.2-Dec.31.
C)P must file a separate return for the period of Oct.2-Dec.31.
D)S must file a separate return for the period of Oct.2-Dec.31.
E)P must file a separate return for the period of Jan.1-Oct.1.

Question 26

Events that trigger recognition of any deferred gain or loss from intercompany transactions in its entirety include all of the following except:

A)The termination of a contract between a member of the group and the employees' union.
B)The cessation of the selling or purchasing member's affiliation with the group.
C)The worthlessness or satisfaction of an obligation (other than an obligation of the group) transferred in an intercompany transaction.
D)The disposition of property outside the group (other than an installment sale) where the property was acquired in an intercompany transaction.
E)The filing of a separate return by either the purchasing or selling member or the entire group.

Question 27

C Corporation directly owns 25 percent of A Corporation stock and 80 percent of B Corporation stock.B Corporation directly owns 70 percent of A Corporation and 10 percent of C Corporation.Which are the subsidiary corporations and which is the parent in this triad?

A)C is the parent, A and B are subsidiaries.
B)C is the parent of B, B is the parent of A, and A is the subsidiary of both B and C.
C)C is the parent, B is the subsidiary.
D)C is the parent, A is the subsidiary.

Question 28

Generally, upon making a proper election an affiliated group is considered to remain in existence for purposes of filing a consolidated tax return if

A)Form 1122 is filed annually with the IRS at least 90 days before the due date of the consolidated tax return.
B)The common parent has at least one subsidiary that was a member of the group for at least six months during the year.
C)The subsidiary has sold no more than 80 percent of its stock to a party or parties other than the parent group.
D)The common parent has filed a consolidated report the year before and has a subsidiary at the end of the tax year.
E)The common parent has at all times during the tax year at least one subsidiary that was a member of the group at any time during the year.

Question 29

Which of the following is (are) considered to be an intercompany transaction that must be accounted for?

A)Built-in deductions
B)Initial inventory adjustments
C)Deferred intercompany transactions
D)Recapture of excess loss accounts
E)All of the above

Question 30

P and its wholly owned subsidiary S file a consolidated return on a calendar year basis.On February 1, 2012 P sells land to S for $30,000.P's basis in the land was $20,000.S held the land until July 20, 2013, whereupon it sold it to an unrelated party for $40,000.What amount and type of income should P report in the consolidated return for 2012?

A)$0
B)$10,000, § 1231
C)$10,000, § 1250
D)$20,000, § 1231
E)$20,000, § 1250

Question 31

Affiliated group P-S has a consolidated capital loss carryover from 2011 of $4,000, which arose as the result of an investment by P.In 2012, S has a short-term capital gain of $5,000 and P has a short-term capital loss of $3,000.How much of P's loss for 2012 will be treated as a loss carryover to 2013, assuming 2011 was the first affiliated year of the group?

A)$0
B)$2,000
C)$3,000
D)$4,000
E)$7,000

Question 32

To counteract abuses that might result if some limitations were not imposed on filing a consolidated tax return, the Regulations place restrictions on:

A)Reverse acquisitions
B)Carryovers and carrybacks to separate return years
C)Separate return limitations years
D)Consolidated return change in ownership
E)All of the above

Question 33

If affiliated member M sells an asset with a cost of $20,000 to affiliated member N for $23,000, how much is eligible for the investment tax credit to be claimed by N?

A)$0
B)$3,000
C)$14,000
D)$20,000
E)$23,000

Question 34

If T owns 60 percent of R Corporation and 75 percent of S Corporation; R owns 25 percent of S; and S owns 40 percent of R, the group can best be described as

A)An affiliated group
B)A brother-sister group
C)A controlled group
D)Both an affiliated group and a controlled group
E)All of the above

Question 35

If any member of an affiliated group does not join in the filing of a consolidated return,

A)The tax liability of each member is determined as if separate returns were filed.
B)The group is automatically terminated by the IRS.
C)The tax liability of each member is determined by spreading out liability among the remaining groups.
D)The common parent is held responsible even if it was an inadvertent error.
E)None of the above

Question 36

In 2011, P purchases and places into service a machine that qualifies for the business tax credit.In 2012, P sells the machine to its wholly owned subsidiary, S.In 2013, S is separated from the group and files a separate tax return for the year.From these facts, choose the correct response below.

A)The sale from P to S constitutes a disposition in 2012.
B)If S sells the machine in 2013, P is responsible for the investment tax credit recapture.
C)If S sells the machine in 2013, S is responsible for the investment tax credit recapture.
D)If S sells the machine in 2013, P or S will have to recapture the investment tax credit in accordance with the tax-sharing agreement in effect at the time of the intercompany sale.
E)None of the responses are correct.

Question 37

In certain situations specified by the Regulations, a subsidiary, rather than the common parent, may make elections and act for the group.

Question 38

Unrecovered inventory amount can be defined as:

A)The intercompany profits attributable to goods that remain in the inventory
B)The corporation's intercompany profit amount that existed on the first day of the year for which the group filed its initial consolidated tax return
C)The lesser of the intercompany profit amount for the current year or the initial inventory amount
D)The amount for one or more chains of includible corporations connected through stock ownership with a common parent corporation
E)The combination of untaxed inventory of each individual corporation with transactions between members of the group eliminated

Question 39

The fundamental difference between an affiliated group and a parent-subsidiary controlled group is

A)An affiliated group requires direct ownership of at least 80 percent of the other corporation's stock.
B)A parent-subsidiary controlled group requires direct ownership of at least 80 percent of the other corporation's stock.
C)An affiliated group may indirectly own 50 percent of the other corporation.
D)A parent-subsidiary controlled group directly owns 100 percent of the other corporation.
E)None of the above

Question 40

S, the wholly owned subsidiary of P, makes qualified charitable contributions for the year of $10,000.S has separate taxable income before the contribution of $80,000.Adjusted consolidated taxable income (before contributions) of the P-S group is $90,000.If S makes the only contribution for the year, calculate the consolidated charitable contribution deduction, assuming no carryovers exist.

A)$1,000
B)$8,000
C)$9,000
D)$10,000

Question 41

A consolidated tax return must be filed on the basis of the common parent's taxable year.Which of the following statements is not true?

A)Each subsidiary must adopt the parent's annual accounting period for the initial consolidated tax return.
B)A subsidiary must obtain advance permission from the Commissioner to change its tax year to conform to the accounting period of the parent.
C)The IRS has ruled that it will allow a parent corporation to change its taxable year to that of its subsidiary.
D)Consolidated tax returns could result in a tax savings.
E)All of the above statements are true.

Question 42

On January 1, 2012, P Corporation acquired all the stock of S Corporation for $8,000 and elected to file a consolidated return.On the acquisition date, S had accumulated earnings and profits of $2,000 and no current EP for 2012.S distributed $500 to P in 2012.In 2013, S had earnings of $1,300 and in 2014 an operating loss of $2,100.Determine P's basis in the S stock as of December 31, 2014.

A)$6,700
B)$7,200
C)$8,000
D)$8,700
E)None of the above

Question 43

W, an unaffiliated first-year corporation, had taxable income for 2011 of $30,000.In 2012, the X-Y affiliated group purchased all the stock of W and filed a consolidated return for that year showing the following loss: $$\begin{array} { l l } \text { Company }& \text { Consolidated Taxable Income (Lass) } \\\mathrm { W } & \$ ( 200,000 ) \\\mathrm { X } & 450,000 \\\mathrm { Y } & ( 400,000 ) \\\text { Total } & \$ ( 150,000 )\end{array}$$ Compute W's loss carryover to 2013.

A)$20,000
B)$50,000
C)$75,000
D)$170,000

Question 44

R, a first-year unaffiliated corporation, had taxable income for 2012 of $180,000.On January 1, 2013, the affiliated group consisting of Y and Z purchases all the stock of R and files a consolidated return for 2012 showing the following consolidated loss: $\mathrm{Y} \quad\$(600,000)$
Z $\quad$ 640,000
R $\quad$ (200,000)
Total $\quad$ $(160,000) How much of the group's loss can be carried back to 2011 and utilized by R?

A)$0
B)$20,000
C)$40,000
D)$160,000
E)$200,000

Question 45

In 2001 S, Inc.purchased an investment for $15,000.On January 1, 2012, P Corp.purchased all of the stock of S.At that time, S's was worth $11,000.If P and S sell the investment in 2011 and file a consolidated tax return for 2012, how much is considered to be a built-in loss?

A)$0
B)$4,000
C)$11,000
D)$15,000
E)$26,000

Question 46

B Corporation purchased an investment asset in 2001for $16,000.On January 1, 2012, C Corporation purchases all the stock of B.B's basis in the investment asset at the time of the stock purchase was $9,000.If B sells the investment in 2012 when B and C filed a consolidated tax return, how much will be considered to be a built-in deduction?

A)$0
B)$7,000
C)$9,000
D)$16,000
E)None of the above

Question 47

At the end of each consolidated return year, the parent's basis in the stock of a subsidiary must be adjusted to reflect the economic results of operation.This is accomplished by:

A)Taking into account the GNP
B)Multiplying the parent's basis by a fraction that represents the subsidiary's presence in the parent company
C)Decreasing the parent's basis by any undistributed gains of the subsidiaries and increasing the basis by any losses sustained by the subsidiaries
D)Increasing the parent's basis by any undistributed gains of the subsidiaries and reducing the basis by any losses sustained by the subsidiaries

Question 48

If Q corporation acquires P Corporation in exchange for its stock, and P shareholders own more than 50 percent of the outstanding stock of Q corporation:

A)P and Q must disband within one year.
B)A reverse acquisition has taken place.
C)Q Corporation will always be the parent company.
D)Q Corporation becomes a shell corporation.

Question 49

Which one of the following statements is true concerning the filing of a consolidated tax return?

A)All members of the affiliated group must conform to the same accounting period.
B)Estimated tax payments are to be determined in the aggregate.
C)Each member of the group is liable for the entire tax liability of the group.
D)The parent corporation has the authority to act as agent for the entire group.
E)All of the above statements are true.

Question 50

J files a separate return for 2012 with an operating loss of $5,000.For 2013, J purchases all of the outstanding stock of D corporation.J has taxable income of $3,000 in 2013 and D has income of $1,000.Under the "lonely parent rule," how much of J Corporation's loss carryover may be used on the consolidated tax return?

A)$4,000
B)$3,000
C)$2,000
D)$1,000