Wave Corporation owns 90% of the stock of Surf, Inc. Each corporation reports the following separate items for the current tax year: $$\begin{array} { | l | r | r | }
\hline & { \text { Wave } } & { \text { Surf } } \
\hline \text { Ordinary operating income (loss) } & \$ 500,000 & \$ ( 100,000 ) \
\hline \text { Capital gain (loss) } & ( 5,000 ) & 7,000 \
\hline \text { Section 1231 gain (loss) } & 3,000 & ( 10,000 ) \
\hline
\end{array}$$ Compute consolidated taxable income if Wave and Surf file a consolidated federal income tax return:

Question

Wave Corporation owns 90% of the stock of Surf, Inc. Each corporation reports the following separate items for the current tax year: $$\begin{array} { | l | r | r | } 
\hline & { \text { Wave } } & { \text { Surf } } \
\hline \text { Ordinary operating income (loss) } & \$ 500,000 & \$ ( 100,000 ) \
\hline \text { Capital gain (loss) } & ( 5,000 ) & 7,000 \
\hline \text { Section 1231 gain (loss) } & 3,000 & ( 10,000 ) \
\hline
\end{array}$$ Compute consolidated taxable income if Wave and Surf file a consolidated federal income tax return:

Quizplus · Accepted Answer

To compute consolidated taxable income, we need to add up the separate items of both corporations while eliminating any intercompany transactions.
 
Wave’s taxable income: 
- Ordinary operating income = $500,000 
- Capital loss = $0 (since it is limited to $3,000 for the current year, the remaining $2,000 is carried over to future years) 
- Section 1231 gain = $3,000

Therefore, Wave’s taxable income is $503,000.

Surf’s taxable income: 
- Ordinary operating loss = ($100,000) 
- Capital gain = $7,000 
- Section 1231 loss = ($10,000)

Therefore, Surf’s taxable income is ($103,000).

However, since Wave owns 90% of Surf’s stock, we need to eliminate 90% of Surf’s operating loss, which is ($90,000).

Consolidated taxable income = Wave taxable income + (Surf taxable income - 90% of Surf operating loss) 
= $503,000 + (($103,000)-($90,000)) 
= $395,000

Therefore, the answer is B, $395,000.

Wave Corporation Owns 90% of the Stock of Surf, Inc