Deck 8: Consolidated Tax Returns

Question 1

A 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

After a takeover,the parent takes a fair market value cost basis in the subsidiary,for both book and tax purposes.

Answer 2

False

Question 3

A wholly owned partnership can join a consolidated group for book,but not for tax,purposes.

Answer 3

True

Question 4

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

Question 5

A consolidated return may be the product of a merger of the affiliates,or of some other tax-favored reorganization.

Question 6

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

Question 7

The calendar-year Sterling Group files its Federal corporate income tax return on a consolidated basis.Its Form 1120 is due on March 15,unless an extended due date is approved by the IRS.

Question 8

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

Question 9

Campbell Corporation left the Crane consolidated tax return group after the 2009 tax year.Crane can add Campbell back to the consolidated group,but no earlier than for the 2019 tax year.

Question 10

A public university cannot join in a consolidated return.

Question 11

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

Question 12

A consolidated Federal income tax group must meet the eligibility requirements of the Regulations only on the first day of the first year for which the election to consolidate is effective.

Question 13

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 14

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

Question 15

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

Question 16

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

Question 17

For consolidated tax return purposes,goodwill is amortized as a deduction to taxable income.Under financial accounting rules,no such amortization is allowed.

Question 18

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

Question 19

The right to file on a consolidated basis is available to a group of corporations when they constitute an "controlled group."

Question 20

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

Question 21

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 22

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 23

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

Question 24

In computing consolidated E & P,a negative adjustment is allowed for the group's Federal income tax payments.

Question 25

A Federal consolidated tax return group commonly applies the "relative tax liability" method as a means to apportion the tax liabilities of the members among the affiliates.

Question 26

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

Question 27

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

Question 28

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

Question 29

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 30

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

Question 31

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

Question 32

Keep Corporation joined an affiliated group by merger in 2010.The group generated a consolidated 2010 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 2008 return and claim a separate refund.

Question 33

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 34

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

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 separate Federal taxable income amounts of the affiliated group members.

Question 37

Keep Corporation joined an affiliated group by merger.The group generated a consolidated NOL this year,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 38

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 39

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

Question 40

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

Question 41

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

A)Compliance costs usually are higher.
B)Realized losses from transactions between affiliates are not recognized immediately.
C)The election generally is binding for future tax years.
D)Gains from one affiliate can be offset by losses from another.This reduces the tax liabilities of the group as a whole.

Question 42

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.

Question 43

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

Question 44

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.

Question 45

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 § 179 depreciation amount allowed.
C)The $40,000 AMT exemption.
D)The floor on the accumulated earnings credit.

Question 46

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 47

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

Question 48

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

A)Additional administrative costs in complying with the election.
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)Dividends received deduction for payments from a subsidiary to the group's parent.

Question 49

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

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

Question 50

Cooper Corporation joined the Duck consolidated Federal 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 NOL.For that year,Duck can deduct up to $1,150,000 of Cooper's NOL in computing consolidated taxable income.

Question 51

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 52

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

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

Question 53

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

Question 54

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 55

Cooper Corporation joined the Duck consolidated Federal 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 profit.For that year,Duck can deduct up to $150,000 of Cooper's NOL in computing consolidated taxable income.

Question 56

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.

Question 57

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 58

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

A)The taxation of intercompany dividends is not eliminated.
B)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 capital loss of one member is not offset against the capital gain of another member of the group.

Question 59

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.

Question 60

How do the members of a 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 61

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 62

ParentCo acquired all of the stock of SubCo on January 1,2009,for $1,000,000.The parties immediately elected to file consolidated income tax returns.SubCo generated taxable income of $150,000 for 2009 and paid a dividend of $100,000 to ParentCo.In 2010,SubCo generated an operating loss of $350,000,and in 2011 it produced taxable income of $75,000.As of the last day of 2011,what was ParentCo's basis in the stock of SubCo?

A)$1,000,000.
B)$875,000.
C)$775,000.
D)$0.

Question 63

ParentCo purchased all of the stock of SubCo on January 1,2009,for $500,000.SubCo produced a loss for 2009 of $150,000 and distributed cash of $25,000 to ParentCo.In 2010,SubCo generated a loss of $750,000;in 2011,it recognized net income of $45,000.What is ParentCo's capital gain or loss if it sells all of its SubCo stock to a nongroup member on January 1,2012,for $50,000?

A)$50,000.
B)$430,000.
C)($380,000).
D)($500,000).

Question 64

ParentCo purchased all of the stock of SubCo on January 2,2009,and the two companies filed consolidated returns for 2009 and thereafter.Both entities were incorporated in 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.No § 382 limit applies.

Assuming that no election is made to forgo the carryback,to what extent are SubCo's 2008 losses used by the group in 2009-2011?

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

Question 65

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

A)The gain or loss on an intercompany transaction never is 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 66

ParentCo and SubCo have filed consolidated returns since both entities were incorporated in 2009.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 2011 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 2009 income.

Question 67

ParentCo purchased all of SubCo's stock on January 1,2010,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 2011 net operating loss:

A)may be carried back to offset SubCo's 2009 taxable income.
B)may be carried forward only and applied against group income if so elected by ParentCo.
C)cannot be carried back against 2009 SubCo income,as consolidated returns were not filed.
D)either a or b,but not both.

Question 68

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.

Question 69

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 70

ParentCo,SubOne and SubTwo have filed consolidated returns since 2009.All of the entities were incorporated in 2008.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 2010 consolidated net operating loss be apportioned among the group members?
ParentCo SubOne SubTwo

A)$60,000 $ 0 $ 0
B)$20,000 $20,000 $20,000
C)$ 0 $20,000 $40,000
D)$ 0 $40,000 $20,000

Question 71

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

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

Question 72

The Philstrom 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)$0.All NOLs of a consolidated group are apportioned to the parent.
B)$300,000.
C)$360,000.
D)$400,000.

Question 73

The Philstrom 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)$0.The SRLY rules apply.
B)$900,000.All NOLs of a consolidated group are apportioned to the parent.
C)$600,000.
D)$540,000.

Question 74

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 75

The Harris 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 76

ParentCo purchased all of the stock of SubCo on January 2,2009,and the two companies filed consolidated returns for 2009 and thereafter.Both entities were incorporated in 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.No § 382 limit applies.

To what extent can SubCo's 2008 losses be used by the group in 2011?

A)$125,000.
B)$75,000.
C)$20,000.
D)$0.

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.
ParentCo SubCo

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

Question 78

ParentCo and SubOne have filed consolidated returns since 2006.SubTwo was formed in 2010 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 2010 net operating loss,what portion of the 2010 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 79

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

Question 80

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)$80,000.