Question 1

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 IRS regulations. Form 1122 is used to show consent of all affiliated corporations to join in the consolidated return.

Question 2

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 3

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

Accepted Answer

This statement is true. When a consolidated net operating loss (NOL) is generated, each affiliate included in the consolidated group is allocated a share of the loss based on their respective pre-NOL contribution to the consolidated taxable income. This share of the NOL can then be used by the affiliate to offset their own taxable income in future years.

Question 4

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 any exchange of goods or services between two companies that are part of the same larger corporate entity. The use of trademarks by a subsidiary for a licensing fee is an example of an intercompany transaction.

Question 5

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

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

Question 6

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

Accepted Answer

In computing consolidated Earnings and Profits (E&P), dividends paid to the parent by group members are not subtracted because these intercompany dividends are eliminated in consolidation.

Question 7

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 8

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 9

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 of apportionment for federal consolidated tax return groups. It takes into account the affiliate's proportionate share of the consolidated group's taxable income.

Question 10

Keep Corporation joined an affiliated group by merger in 2014. The group generated a consolidated 2014 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 2012 return, and the parent can claim a tax refund.

Accepted Answer

In a consolidated group, net operating losses (NOLs) are typically 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; the parent company manages the NOL for the entire group.

Question 11

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 12

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 13

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 14

Keep Corporation joined an affiliated group by merger in 2010. The group generated a 2014 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 2015.

Accepted Answer

When a corporation joins an affiliated group, its NOLs are combined with the NOLs of the group to determine the consolidated NOL. Keep's share of the 2014 consolidated NOL is $50,000, and as a member of the affiliated group, it is included in the group's NOL carryforward to 2015. Therefore, the statement is true.

Question 15

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 16

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 rules for carrying back and forward net operating losses (NOLs) of federal consolidated tax returns.

Question 17

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 statement is true. When computing consolidated taxable income, capital gains and losses are removed from the taxable incomes of group members and determined on a group basis. This helps to prevent double-counting and ensures that the group's overall tax liability is calculated accurately.

Question 18

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 is true as per the general rule of computing consolidated taxable income for a group of affiliated companies.

Question 19

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 20

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

Accepted Answer

This statement is true. Each member of a consolidated group is jointly and severally liable for the group's entire income tax liability. This means that if one member fails to pay their portion of the liability, the other members are liable for making up the difference.

Quiz 8: Consolidated Tax Returns