ParentCo purchased all of the stock of ChildCo on January 2, 2011, and the two companies filed consolidated returns for 2011 and thereafter. Both entities were incorporated in 2010. 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. Assuming that no election is made to forgo the carryback, to what extent are ChildCo's 2010 losses used by the group in 2011-2013?
A) $95,000.
B) $70,000.
C) $60,000.
D) $50,000.
E) $0.

Question

ParentCo purchased all of the stock of ChildCo on January 2, 2011, and the two companies filed consolidated returns for 2011 and thereafter. Both entities were incorporated in 2010. 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.  Assuming that no election is made to forgo the carryback, to what extent are ChildCo's 2010 losses used by the group in 2011-2013?
A) $95,000. 
B) $70,000. 
C) $60,000. 
D) $50,000. 
E) $0.

Quizplus · Accepted Answer

Under the consolidated return regulations, losses incurred in years prior to the acquisition of a subsidiary may be carried back against the consolidated group's income for the period preceding the year of acquisition (i.e., the "acquisition year") and then forward against consolidated group income for the 20 taxable years following the year of the loss.
In this case, since ParentCo purchased ChildCo on January 2, 2011, 2010 is the loss year (i.e., the year prior to the acquisition year). Therefore, ChildCo's 2010 losses can be carried back against the consolidated group's income for 2011 (the year preceding the acquisition year) and then forward against consolidated group income for the 20 taxable years following 2010.
ChildCo's 2010 losses were $95,000, but the consolidated group can only use the losses to the extent they can offset consolidated group taxable income. The consolidated group had taxable income of $25,000 in 2011 and $45,000 in 2012, so the $95,000 in losses cannot fully offset these amounts. However, the consolidated group had taxable income of only $70,000 in 2013, so the $95,000 in losses can fully offset this amount, leaving no remaining losses to carry forward to future years.
Therefore, the correct answer is B) $70,000.

ParentCo Purchased All of the Stock of ChildCo on January