Question 1

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.

Accepted Answer

The statement accurately describes the treatment of the domestic production activities deduction in the computation of consolidated taxable income.

Question 2

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.

Accepted Answer

Consolidated taxable income removes capital gains and losses on a group basis, not on an individual member basis.

Question 3

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.

Accepted Answer

The subsidiary does not recognize the $30,000 gain as ordinary income immediately on a consolidated return because intercompany transactions are eliminated in consolidation. The gain would be deferred and not recognized until the property is sold to an outside party.

Question 4

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.

Accepted Answer

The election regarding the allocation of a tax year's income tax liability among the members of a Federal consolidated group is not irrevocable. The parent corporation can choose a different allocation method in a subsequent year by filing a statement with its consolidated return for that year.

Question 5

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.

Accepted Answer

The "relative taxable income" method is one of the acceptable methods for apportioning tax liabilities among members of a federal consolidated tax return group. It takes into account the relative amounts of taxable income of each member to determine their share of the group's overall tax liability.

Question 6

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

Accepted Answer

When a consolidated NOL (Net Operating Loss) is generated, each affiliate is allocated a share of the loss based on their proportionate share of the consolidated taxable income. This is known as the "separate return limitation year" method.

Question 7

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

Accepted Answer

The answer of In computing consolidated E & P, a...

Question 8

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.

Accepted Answer

This statement is true according to IRS regulations. All affiliates must consent to the election on Form 1122 for the newly formed consolidated return.

Question 9

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

Accepted Answer

In computing consolidated Earnings and Profits (E&P), dividends paid to the parent by group members are not subtracted because these intercompany dividends are eliminated in consolidation.

Question 10

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

Accepted Answer

This is true according to IRS regulations. If a corporation does not elect to waive the carryback period or to solely carry forward the NOLs, then the NOLs are automatically carried back two years and carried forward twenty years.

Question 11

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

Accepted Answer

The answer of Each of the members of a Federal...

Question 12

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).

Accepted Answer

The answer of Consolidated group members each must use the...

Question 13

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.

Accepted Answer

The statement is false. A consolidated NOL cannot be carried back to a separate return year. It can only be carried back or forward to other consolidated return years in the same affiliated group.

Question 14

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

Accepted Answer

According to the U.S. tax law, members of a consolidated group are jointly and severally liable for the entire consolidated group's income tax liability. This means that if any member fails to pay its share, the other members are responsible for paying the full amount.

Question 15

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.

Accepted Answer

The answer of If subsidiary stock is redeemed or sold...

Question 16

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

Accepted Answer

This is true as per the rules of federal taxation on consolidated groups.

Question 17

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.

Accepted Answer

The parent's basis in the subsidiary's stock cannot become negative; instead, it would be reduced to zero, and any losses beyond that point would not be recognized for tax purposes until the subsidiary generates future income or the investment is disposed of.

Question 18

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.

Accepted Answer

This is a valid example of an intercompany transaction.

Question 19

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

Accepted Answer

In computing consolidated taxable income, compensation amounts are not removed from the taxable incomes of the group members. Each member's taxable income is calculated individually, including their compensation amounts, before being combined to determine the group's consolidated taxable income.

Question 20

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.

Accepted Answer

According to IRS regulations, when a corporation joins an affiliated group through merger, its pre-acquisition NOLs are generally lost. However, the post-acquisition NOLs generated by the consolidated group can be carried forward and utilized by the members. Therefore, Keep's share of the 2016 consolidated NOL is included in the group's NOL carryforward to 2017.

Quiz 8: Consolidated Tax Returns