Question 1

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

Accepted Answer

This means that if one member of the group cannot pay their share of the tax liability, the other members are responsible for covering that amount. It is important for each member to understand the potential risks and liabilities associated with being part of a consolidated group.

Question 2

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 3

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

When a corporation joins an affiliated group by merger, the NOL carryforwards of the group can be used to offset income of the acquired corporation in future tax years. Keep's share of the 2016 NOL is included in the group's NOL carryforward and can be used by the group to offset future income.

Question 4

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 5

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

This is true. Consolidated taxable income calculations remove capital gains and losses from the individual taxable incomes of members and instead determine them on a group basis.

Question 6

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 7

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 8

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

An intercompany transaction refers to a financial transaction that takes place between two or more entities or divisions that are part of the same parent company. The use of trademarks is an example of such a transaction where the parent company licenses it to a subsidiary for a fee.

Question 9

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 portion of the consolidated taxable income for the year in which the NOL was incurred. This allocation can then be used to offset future taxable income for each affiliate.

Question 10

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 11

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 is correct. The DPAD is calculated on a group basis and deducted from the consolidated taxable income of the group members.

Question 12

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 a valid method for apportioning tax liabilities among members of a Federal consolidated tax return group. This method compares each member's taxable income to the total taxable income of the group to determine their relative share of the tax liability.

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

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

Accepted Answer

Without any elections made by the taxpayer, Federal consolidated NOLs (net operating losses) can be carried back two years and then forward up to 20 years.

Question 15

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

Accepted Answer

Dividends paid to the parent by group members are added back in computing consolidated E & P.

Question 16

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 17

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 18

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

In a Federal consolidated tax return group, the $40,000 AMT exemption is applied to the group as a whole, not individually to each member.

Question 19

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 is true according to the regulations for consolidated tax returns. Form 1122 is used to show the consent of each member corporation to join the group return, and it must be attached to the group's Form 1120.

Question 20

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 statement is true. Consolidated taxable income is computed by adding the separate federal taxable income amounts of each member of the affiliated group.

Quiz 8: Consolidated Tax Returns