Question 1

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

Accepted Answer

The answer of In computing consolidated E & P, dividends...

Question 2

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 3

Keep Corporation joined an affiliated group by merger. The group generated a 2011 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 2012.

Accepted Answer

When a corporation joins an affiliated group by merger, its share of the group's NOL is included in the group's consolidated NOL. This consolidated NOL can be carried forward to subsequent years, and Keep's share of the loss would be included in the carryforward to 2012.

Question 4

In computing consolidated taxable income, § 1231 gains and losses are removed from the taxable incomes of the group members and determined on a group basis.

Accepted Answer

According to the Consolidated Return Regulations, § 1231 gains and losses are removed from the taxable incomes of the group members and determined on a group basis when computing consolidated taxable income.

Question 5

Consolidated group members each must use the same tax year end.

Accepted Answer

The tax year end for all members of a consolidated group must be the same. This requirement helps to simplify the process of preparing and filing consolidated tax returns.

Question 6

Keep Corporation joined an affiliated group by merger in 2011. The group generated a consolidated 2011 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 2009 return, and the parent can claim a tax refund.

Accepted Answer

In a consolidated group, net operating losses (NOLs) are generally carried back or forward at the group level, not at the individual member level. Keep Corporation cannot carry back its share of the loss to its separate return.

Question 7

A Federal consolidated tax return group commonly applies the "relative tax liability" method as a means to apportion the tax liabilities of the members among the affiliates.

Accepted Answer

The "relative tax liability" method is a commonly used method for apportioning tax liabilities among members of a Federal consolidated tax return group. Under this method, the tax liabilities of each member are determined based on their proportionate share of the group's income and deductions. This method is typically used to ensure that each member is responsible for paying their fair share of the group's overall tax liability.

Question 8

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

Accepted Answer

This is true according to the IRS regulations. If a corporation does not make an election to waive the carryback period, the NOL must be carried back two years first and then carried forward for up to twenty years.

Question 9

In computing consolidated E & P, a negative adjustment is allowed for the group's Federal income tax payments.

Accepted Answer

The answer of In computing consolidated E & P, a...

Question 10

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 11

With the filing of its first consolidated return, a Federal consolidated group makes an irrevocable election as to how it will allocate a tax year's income tax liability among the group members.

Accepted Answer

The answer of With the filing of its first consolidated...

Question 12

The starting point in computing consolidated taxable income is the separate Federal taxable income amounts of the affiliated group members.

Accepted Answer

The starting point in computing consolidated taxable income is indeed the separate Federal taxable income amounts of the affiliated group members.

Question 13

If subsidiary stock is redeemed or sold outside the group when an excess loss account exists, the selling parent corporation recognizes capital gain income equal to the account balance.

Accepted Answer

When subsidiary stock is redeemed or sold outside the group and an excess loss account exists, the selling parent corporation recognizes capital gain income equal to the account balance. This is because the excess loss account represents previously deducted losses that were not allowed due to the subsidiary stock ownership and are therefore recaptured as income when the stock is disposed of.

Question 14

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

The answer of Each of the members of a Federal...

Question 15

In computing consolidated taxable income, cost of goods sold is removed from the taxable incomes of the group members and determined on a group basis.

Accepted Answer

In computing consolidated taxable income, each group member calculates its taxable income, including cost of goods sold, individually before consolidation adjustments are made.

Question 16

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 DPAD is removed from the taxable incomes of the group members and determined on a group basis when computing consolidated taxable income.

Question 17

An example of an intercompany transaction is the use of the financial accounting software of the parent corporation by a subsidiary for an arm's length management fee.

Accepted Answer

An intercompany transaction is a transaction between two different entities within the same company or group of companies. In this example, the use of financial accounting software by a subsidiary for a management fee is a transaction between the parent corporation and its subsidiary, making it an intercompany transaction.

Question 18

When a consolidated NOL is generated, each affiliate is allocated a share of the loss.

Accepted Answer

This is correct, as each affiliate's share of the NOL is calculated based on their proportionate share of the consolidated taxable income.

Question 19

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

Accepted Answer

This is true under the doctrine of joint and several liability, which means each member of the consolidated group is individually responsible for the entire consolidated income tax liability. This is why it is important for companies considering joining a consolidated group to carefully consider the risks and potential liabilities involved.

Question 20

All affiliates joining in a newly formed consolidated return must consent to the election on Form 1122, as attached to the tax return for the group.

Accepted Answer

All affiliates joining in a newly formed consolidated return must indeed consent to the election on Form 1122, as attached to the tax return for the group. This form indicates the agreement to be included in the consolidated return and specifies the year for which the election is being made.

Quiz 8: Consolidated Tax Returns