ParentCo purchased all of the stock of ChildCo on January 2, Year 2, and the two companies filed consolidated returns for that year and thereafter. Both entities were incorporated in Year 1. 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. $$\begin{array} { l c c c }
& \text { ParentCo's } & \text { ChildCo's Taxable } & \text { Consolidated } \
\text { Year } & \text { Taxable Income } & \text { Income } & \text { Taxable Income } \
\text { Year 1 } & \$ 10,000 & ( \$ 95,000 ) & \mathrm { N } / \mathrm { A } \
\text { Year 2 } & \$ 10,000 & \$ 50,000 & ? \
\text { Year 3 } & ( \$ 25,000 ) & \$ 40,000 & ? \
\text { Year 4 } & \$ 10,000 & \$ 10,000 & ?
\end{array}$$ Assuming that no election is made to forgo the carryback, to what extent are ChildCo's Year 1 losses used by the group in Year 2-Year 4?
A)$100,000
B)$95,000
C)$75,000
D)$0

Question

ParentCo purchased all of the stock of ChildCo on January 2, Year 2, and the two companies filed consolidated returns for that year and thereafter. Both entities were incorporated in Year 1. 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. $$\begin{array} { l c c c } 
& \text { ParentCo's } & \text { ChildCo's Taxable } & \text { Consolidated } \
\text { Year } & \text { Taxable Income } & \text { Income } & \text { Taxable Income } \
\text { Year 1 } & \$ 10,000 & ( \$ 95,000 ) & \mathrm { N } / \mathrm { A } \
\text { Year 2 } & \$ 10,000 & \$ 50,000 & ? \
\text { Year 3 } & ( \$ 25,000 ) & \$ 40,000 & ? \
\text { Year 4 } & \$ 10,000 & \$ 10,000 & ?
\end{array}$$ Assuming that no election is made to forgo the carryback, to what extent are ChildCo's Year 1 losses used by the group in Year 2-Year 4?
A)$100,000
B)$95,000
C)$75,000
D)$0

Quizplus · Accepted Answer

ChildCo's Year 1 loss of $95,000 can be carried forward to offset future taxable income. In Year 2, the consolidated taxable income is $60,000 ($10,000 + $50,000), so $60,000 of the loss is used. In Year 3, the consolidated taxable income is $15,000 ($40,000 - $25,000), so $15,000 of the loss is used. In Year 4, the consolidated taxable income is $20,000 ($10,000 + $10,000), so $20,000 of the loss is used. In total, $95,000 of the loss is used over the three years.

ParentCo Purchased All of the Stock of ChildCo on January