Pants and Skirt Corporations are affiliated and have filed consolidated tax returns for the past three years. Pants acquires 100% of Zipper stock on January 1 of 2019. Zipper Corporation filed separate returns previously. Pants, Skirt, and Zipper filed a consolidated return for 2019 and reported the following taxable incomes: How much of the 2018 Zipper NOL be used to offset CTI in 2019?
A)$20,000
B)$17,000
C)$16,000
D)$0

Question

Pants and Skirt Corporations are affiliated and have filed consolidated tax returns for the past three years. Pants acquires 100% of Zipper stock on January 1 of 2019. Zipper Corporation filed separate returns previously. Pants, Skirt, and Zipper filed a consolidated return for 2019 and reported the following taxable incomes:  How much of the 2018 Zipper NOL be used to offset CTI in 2019?
A)$20,000 
B)$17,000 
C)$16,000 
D)$0

Quizplus · Accepted Answer

According to IRS regulations, when a subsidiary is acquired, any NOL carryforward from the previous years is limited by the amount of taxable income that the subsidiary generates during the post-acquisition period as part of the consolidated group.

In this case, Zipper Corporation generated $16,000 of taxable income as part of the consolidated group in 2019. Therefore, the maximum amount of NOL carryforward that can be used to offset CTI in 2019 is $16,000.

Option A is incorrect because $20,000 exceeds the 2019 taxable income of Zipper Corporation, which is the limit for NOL carryforward. Option B is incorrect because it does not take into account the 2019 taxable income of Zipper Corporation. Option D is incorrect because Zipper Corporation had a valid NOL carryforward, but as stated above, it is limited by the amount of taxable income generated in the post-acquisition period.

Pants and Skirt Corporations Are Affiliated and Have Filed Consolidated