Deck 8: Consolidated Tax Returns

Question 1

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

Answer 1

False
An excess loss account is created.Stock basis cannot be less than zero.

Question 2

A for-profit hospital can join an existing Federal consolidated group.

Answer 2

True
Group membership can change even after an election to file consolidated is in effect.

Question 3

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.

Answer 3

False
The parent recognizes capital gain.

Question 4

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

Question 5

A Federal consolidated group makes an annual election to allocate the tax liability for the year among the group members.

Question 6

Over time,the consolidated return rules have shifted from penalizing joint filing to an encouragement for conglomerates to elect to file on a consolidated basis.

Question 7

The rules for computing Federal consolidated taxable income strictly follow those governing financial reporting for conglomerates.

Question 8

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

Question 9

Consolidated group members each can use a different tax year end.

Question 10

In an affiliated group,the parent must own 100 percent of each of the subsidiaries.

Question 11

A hedge fund,taxed like a partnership,can join in a consolidated return.

Question 12

Congress is the chief source of the consolidated return rules.

Question 13

Legislative Regulations are the basis for most of the consolidated return rules. The Code offers few details in this area.

Question 14

A public university cannot join in a consolidated return.

Question 15

A corporation organized outside of the U.S.cannot be included in a Federal consolidated return.

Question 16

A for-profit hospital can remain in the consolidated group after it gains tax-exempt status.

Question 17

The § 1231 gain of a consolidated group can be less than the sum of the gains from asset sales of the group members when filing separately.

Question 18

A Federal consolidated group can claim a dividends received deduction for payments among the affiliates.

Question 19

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

Question 20

Tax incentives constitute the primary motivation for most corporations to operate on a consolidated basis.

Question 21

Affiliates must keep track of their shares of a consolidated NOL.

Question 22

When a member departs a consolidated group,it forfeits the use of any NOLs it generated while in the group.

Question 23

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

Question 24

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.

Question 25

Members of a controlled group share all but which of the following tax attributes?

A)The lower tax rates on the first $75,000 of taxable income.
B)The $40,000 AMT exemption.
C)The § 179 depreciation amount allowed.
D)All of the above attributes are shared among controlled group members.

Question 26

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

A)Compliance costs usually are higher.
B)Realized losses from transactions between affiliates cannot be recognized immediately.
C)Operating losses of an affiliate reduce the tax basis of the parent's ownership interest in the entity. This increases the gain on the disposal of the affiliate.
D)Gains from one affiliate can be offset by losses from another. This reduces the tax liabilities of the group as a whole.
E)All of the above are disadvantages.

Question 27

Alb,Bud,and Coe constitute an affiliated group of corporations.Which of the following tax effects becomes more restrictive if an election is made to file 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)Choice of members' tax year ends.
E)None of the above.

Question 28

In computing consolidated taxable income,capital and § 1231 gains and losses are removed from the taxable incomes of the group members and determined on a group basis.

Question 29

The domestic production activities deduction (DPAD)of a consolidated group can be greater than the sum of the deductions of the group members when filing separately.

Question 30

An affiliated group aggregates its separate charitable contributions,deductions for which then are subject to an annual limitation of 10% of consolidated taxable income.

Question 31

Keep Corporation joined an affiliated group by merger in 2005.The group generated a consolidated 2009 NOL,and Keep's share of the loss was $50,000.If the parent elects to forgo an NOL carryback,refunds or tax reductions resulting from the loss are received solely by the parent,and not by Keep separately.

Question 32

Which of the following tax items is not likely to be considered when a group of related corporations is evaluating the election to file on a consolidated basis?

A)Foreign tax payments.
B)Capital gains and losses.
C)Deferral of gains from intercompany transactions.
D)AMT preferences and adjustments.
E)All of the above should be considered.

Question 33

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

Question 34

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

Question 35

In computing consolidated E & P,dividends paid between group members are ignored.

Question 36

Keep Corporation joined an affiliated group by merger in 2009.The group generated a consolidated 2009 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 2007 return and claim a separate refund.

Question 37

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

A)None of the group members can use the LIFO method of accounting for inventories.
B)All of the corporations must be members of an affiliated group.
C)None of the corporations can be ineligible under the Code to file on a consolidated basis with the others.
D)The group members must share a common tax year end.
E)All of the above are requirements for the consolidation election.

Question 38

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

Question 39

Which,if any,of the following is a disadvantage of electing to file a consolidated return?

A)The taxation of intercompany dividends is not eliminated.
B)The capital loss of one member is not offset against the capital gain of another member of the group.
C)The tax basis of investments in the stock of subsidiaries is unaffected by members contributing to consolidated taxable income.
D)Recognition of losses from certain intercompany transactions is deferred.
E)None of the above is a disadvantage.

Question 40

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 41

How do the members of a consolidated group split among them 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.
E)Using some other method.

Question 42

ParentCo and SubOne have filed consolidated returns since 2006.SubTwo was formed in 2009 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 2009 net operating loss,what portion of the 2009 consolidated net operating loss is carried back to offset prior years' income?

A)$120,000.
B)$90,000.
C)$40,000.
D)$30,000.
E)$0.

Question 43

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

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

Question 44

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

A)A sole proprietor with annual sales of more than $50 million.
B)A limited liability company.
C)A company organized in Germany.
D)A corporation that operates in seven different U.S. states.
E)None of the above can join a Federal consolidated group.

Question 45

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

A)According to their relative net asset holdings.
B)According to an internal tax-sharing agreement.
C)Against the parent of the group.
D)Against the member of the group that generated the tax.
E)No particular order of collection is prescribed by IRS rules.

Question 46

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 $80,000,and SubCo had income of $50,000.The group's consolidated taxable income for the year was:

A)$165,000.
B)$130,000.
C)$95,000.
D)Some other amount.

Question 47

ParentCo purchased all of SubCo's stock on January 1,2008,and the companies have filed consolidated returns since 2008.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 2009 net operating loss:

A)may be carried back to offset SubCo's 2007 taxable income.
B)may be carried forward only and applied against group income if so elected by ParentCo.
C)cannot be carried back against 2007 SubCo income, as consolidated returns were not filed.
D)either a or b, but not both.

Question 48

ParentCo acquired all of the stock of SubCo on January 1,2007,for $1,000,000.The parties immediately elected to file consolidated income tax returns.SubCo generated taxable income of $50,000 for 2007 and paid a dividend of $75,000 to ParentCo.In 2008,SubCo generated an operating loss of $350,000,and in 2009 it produced taxable income of $65,000.As of the last day of 2009,what was ParentCo's basis in the stock of SubCo?

A)$1,000,000.
B)$690,000.
C)$340,000.
D)$0.

Question 49

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

A)U.S. corporation engaged in the oil and gas industry.
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)A limited liability company operating exclusively in Texas.
E)None of the above can file consolidated returns.

Question 50

The Rub,Sal,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 $1,800 penalty is attributable solely to Ton.At present,only Rub 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 Rub to satisfy the outstanding liabilities of the consolidated group?

A)$4,800.
B)$90,000.
C)$91,800.
D)$93,000.
E)$94,800.

Question 51

The consolidated group reported the following taxable income amounts.Determine the net operating loss (NOL)that is apportioned to Parent.

A)$525,000.
B)$600,000.
C)$700,000. All NOLs of a consolidated group are apportioned to the parent.
D)$0. The SRLY rules apply.

Question 52

ParentCo,SubOne and SubTwo have filed consolidated returns since 2008.All of the entities were incorporated in 2007.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 2009 consolidated net operating loss be apportioned among the group members?

Question 53

The consolidated group reported the following taxable income amounts.Determine the net operating loss (NOL)that is apportioned to Junior.

A)$100,000.
B)$175,000.
C)$200,000.
D)$0. All NOLs of a consolidated group are apportioned to the parent.

Question 54

ParentCo and SubCo have filed consolidated returns since both entities were incorporated in 2007.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 2009 consolidated loss:

A)must be carried forward before it can be carried back.
B)must be carried forward, unless an election to forgo carryforward is made by the parent.
C)must be carried back, unless an election to forgo the carryback is made by the parent.
D)can only be used to offset SubCo's future income.
E)cannot be used to offset any of ParentCo's 2007 income.

Question 55

The consolidated group reported the following taxable income amounts.Determine the net operating loss (NOL)that is apportioned to Minor.

A)$0. Minor did not report an NOL of its own.
B)$100,000.
C)$233,333.
D)$0. All NOLs of a consolidated group are apportioned to the parent.

Question 56

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 LIFO).
D)Tax year end.
E)None of the above is subject to conformity among the affiliates.

Question 57

ParentCo purchased all of the stock of SubCo on January 1,2007,for $900,000.SubCo produced a loss for 2007 of $275,000 and distributed cash of $15,000 to ParentCo.In 2008,SubCo generated a loss of $850,000; in 2009,it recognized net income of $15,000.What is ParentCo's capital gain or loss if it sells all of its SubCo stock to a nongroup member on January 1,2010,for $50,000?

A)($210,000).
B)($850,000).
C)$50,000.
D)$275,000.
E)Some other amount.

Question 58

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

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

Question 59

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 $80,000.What is the group's consolidated taxable income for the year?

A)$215,000.
B)$195,000.
C)$175,000.
D)$155,000.
E)Some other amount.

Question 60

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

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

Question 61

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)$107,000.
B)$108,000.
C)$108,900.
D)$115,800.
E)$121,000.

Question 62

ParentCo's separate taxable income was $100,000,and SubCo's was $40,000.Consolidated taxable income before contributions was $125,000.Charitable contributions made by the affiliated group included $20,000 by ParentCo and $30,000 by SubCo.Compute the group's maximum charitable contribution deduction.

A)$12,500.
B)$20,000.
C)$30,000.
D)$50,000.
E)Some other amount.

Question 63

Match each of the following terms with the appropriate description, in the context of a consolidated Federal income tax return.
a.Advantage of consolidating
b.Disadvantage of consolidating
Offsetting gains against other members' losses

Question 64

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

A)The gain or loss on an intercompany transaction is never taxed.
B)An intercompany transaction is eliminated from consolidated taxable income.
C)All intercompany gains are recognized, but losses must be deferred.
D)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.
E)The gain or loss on an intercompany transaction is deferred for up to ten years, after which it is recognized.

Question 65

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.
E)Some other amount.

Question 66

ParentCo purchased all of the stock of SubCo on January 2,2008,and the two companies filed consolidated returns for 2008 and thereafter.Both entities were incorporated in 2007.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 SubCo's 2007 losses be used by the group in 2010?

A)$175,000.
B)$130,000.
C)$90,000.
D)$0.
E)Some other amount.

Question 67

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.

Question 68

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)$122,000.
B)$114,000.
C)$102,600.
D)$96,000.
E)$95,000.

Question 69

The purpose of the rules governing intercompany sales on a Federal consolidated tax return is to treat the group as though it is:

A)One company with several divisions.
B)A foreign corporation.
C)A partnership of the various affiliates.
D)Not subject to the related party loss rules.
E)Exempt from being audited for the first five years of the consolidation election.

Question 70

Match each of the following terms with the appropriate description, in the context of a consolidated Federal income tax return.
a.Advantage of consolidating
b.Disadvantage of consolidating
Binding nature of election over multiple tax years

Question 71

Match each of the following terms with the appropriate description, in the context of a consolidated Federal income tax return.
a.Advantage of consolidating
b.Disadvantage of consolidating
Sharing of tax benefits,exemptions,low income tax brackets

Question 72

Sub sells an asset to Parent at a realized loss.That loss is not recognized by the group in the year of the sale,because of the:

A)Matching rule.
B)Acceleration rule.
C)Transfer pricing rules.
D)Wash sale rule.
E)None of the above. The group deducts the loss.

Question 73

Match each of the following terms with the appropriate description, in the context of a consolidated Federal income tax return.
a.Advantage of consolidating
b.Disadvantage of consolidating
Deferral of loss on intercompany transactions

Question 74

Match each of the following terms with the appropriate description, in the context of a consolidated Federal income tax return.
a.Advantage of consolidating
b.Disadvantage of consolidating
Additional compliance costs

Question 75

Match each of the following terms with the appropriate description, in the context of a consolidated Federal income tax return.
a.Advantage of consolidating
b.Disadvantage of consolidating
Deferral of gain on intercompany transactions

Question 76

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

A)Dividends received deduction.
B)§ 1231 losses.
C)Charitable contributions.
D)Net operating losses.
E)Cost recovery deduction.

Question 77

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.

Question 78

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.

Question 79

ParentCo's separate taxable income was $100,000,and SubCo's was $40,000.Consolidated taxable income before contributions was $125,000.Charitable contributions made by the affiliated group included $10,000 by ParentCo and $1,000 by SubCo.Compute the group's maximum charitable contribution deduction.

A)$0.
B)$11,000.
C)$12,500.
D)$14,000.
E)Some other amount.

Question 80

ParentCo purchased all of the stock of SubCo on January 2,2008,and the two companies filed consolidated returns for 2008 and thereafter.Both entities were incorporated in 2007.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 SubCo's 2007 losses used by the group in 2008-2010?

A)$95,000.
B)$68,000.
C)$50,000.
D)$30,000.
E)$0.