CHAPTER 8—CONSOLIDATED TAX RETURNS Key
1. The consolidated return regulations are interpretive regulations, and therefore do not have the force and effect
of statutory law.
2. An advantage of consolidated returns is that intercompany profits on the sale of goods and services may be
deferred until later years.
3. An advantage of consolidated returns is that losses of a subsidiary that reduce the tax liability of the group
also decrease the parent’s tax basis in the subsidiary.
4. During the initial year that a group elects to file a consolidated tax return, it may, prior to the extended due
date of the return, revoke its election and file separate tax returns.
5. According to the Regulations, a consolidated tax return must be filed on the basis of the common parent’s tax
year.
6. After a group elects to file a consolidated tax return, it may shift back to separate returns in a later year if
there is unanimous consent among members of the group.
7. In 2009, a parent may elect to include a subsidiary as a member of the group from the beginning of the
taxable year if it was acquired within the first 30 days of the taxable year.
8. Income or loss from changes in accounting methods must be specially accounted for in intercompany
transactions in determining the “separate taxable income” of each member of the affiliated group.
9. In computing the separate taxable income of an affiliated group, intercompany dividends are included in the
calculation.
10. Gains or losses on assets acquired in “deferred intercompany transactions” will not be partially recognized
when the purchasing member of the group begins depreciating that asset.
11. Distributions (dividends, redemptions, or liquidations) between members and dispositions of member
obligations (or bad debts with respect to such obligations) are considered intercompany transactions.
12. Any gains or losses on an intercompany transaction are deferred, and recognized only when realized outside
of the affiliated group.
13. Perhaps the most important advantage of a consolidated return is that the net operating losses of one group
member can be used currently to offset the taxable income of another member. It is only when the sum of the
separate NOLs exceeds the sum of the separate taxable incomes that a consolidated NOL results. The
consolidated NOL may be carried back or forward.
14. A loss for which a separate return was filed may in some circumstances be carried forward to a consolidated
return year without regard to any loss limitations in later years.
15. The “lonely parent rule” allows a parent corporation to utilize its losses from a pre-affiliation return year to
offset consolidated taxable income of the current affiliated year.
16. The consolidated regulations inhibit the acquisition of a corporation that contains assets with a fair market
value less than basis.
17. An excess loss account is provided for by the Regulations and records deductions in excess of basis until
such time as the excess deductions are recovered. Dispositions can include a sale, a redemption, or a
subsidiary’s stock becoming worthless.
18. Each subsidiary of an affiliated group must adopt the parent’s accounting period for the first taxable year
that its income is included in the consolidated return.
19. A parent corporation may not change its taxable year to that of its subsidiaries without obtaining advance
permission from the Commissioner.
20. For the first two years that a group files a consolidated tax return, it may make estimated payments on either
a consolidated or separate return basis.
21. In certain situations specified by the Regulations, a subsidiary, rather than the common parent, may make
elections and act for the group.
22. Which of the following is not considered an advantage of filing a consolidated tax return?
23. Which of the following is considered to be an “includible corporation” in an affiliated group of
corporations?
24. C Corporation directly owns 25 percent of A Corporation stock and 80 percent of B Corporation stock. B
Corporation directly owns 70 percent of A Corporation and 10 percent of C Corporation. Which are the
subsidiary corporations and which is the parent in this triad?
25. The fundamental difference between an affiliated group and a parent-subsidiary controlled group is
26. If T owns 60 percent of R Corporation and 75 percent of S Corporation; R owns 25 percent of S; and S
owns 40 percent of R, the group can best be described as
27. If any member of an affiliated group does not join in the filing of a consolidated return,
28. Generally, upon making a proper election an affiliated group is considered to remain in existence for
purposes of filing a consolidated tax return if
29. V is the parent company of an affiliated calendar year group of companies filing a consolidated tax return. V
purchases all of the outstanding stock of calendar year C Corporation on January 29, 2012. C Corporation must
30. If P, S, and T file a consolidated tax return on a calendar year basis, and P sells the stock of S on October 1,
then:
31. Which of the following is (are) considered to be an intercompany transaction that must be accounted for?
32. In the consolidated tax formula, which of the following is not eliminated from combined taxable income to
arrive at consolidated taxable income?
33. P and its wholly owned subsidiary S file a consolidated return on a calendar year basis. On February 1, 2012
P sells land to S for $30,000. P’s basis in the land was $20,000. S held the land until July 20, 2013, whereupon
it sold it to an unrelated party for $40,000. What amount and type of income should P report in the consolidated
return for 2012?
34. Events that trigger recognition of any deferred gain or loss from intercompany transactions in its entirety
include all of the following except:
35. Unrecovered inventory amount can be defined as:
36. X and its subsidiary B file a consolidated tax return for 2012. During the year, B distributes $15,000 cash to
X. X’s basis in its B stock is $9,000, and B has current earning and profits for its first year of $6,000. For 2012,
no gain is recognized. How much will go to an excess loss account?
37. Affiliated group P-S has a consolidated capital loss carryover from 2011 of $4,000, which arose as the result
of an investment by P. In 2012, S has a short-term capital gain of $5,000 and P has a short-term capital loss of
$3,000. How much of P’s loss for 2012 will be treated as a loss carryover to 2013, assuming 2011 was the first
38. S, the wholly owned subsidiary of P, makes qualified charitable contributions for the year of $10,000. S has
separate taxable income before the contribution of $80,000. Adjusted consolidated taxable income (before
contributions) of the P-S group is $90,000. If S makes the only contribution for the year, calculate the
consolidated charitable contribution deduction, assuming no carryovers exist.
39. If affiliated member M sells an asset with a cost of $20,000 to affiliated member N for $23,000, how much
is eligible for the investment tax credit to be claimed by N?
40. If affiliated member M sells an asset with a cost of $20,000 to affiliated member N for $23,000, what is N’s
basis in the asset?
41. In 2011, P purchases and places into service a machine that qualifies for the business tax credit. In 2012, P
sells the machine to its wholly owned subsidiary, S. In 2013, S is separated from the group and files a separate
tax return for the year. From these facts, choose the correct response below.
42. To counteract abuses that might result if some limitations were not imposed on filing a consolidated tax
return, the Regulations place restrictions on:
43. J files a separate return for 2012 with an operating loss of $5,000. For 2013, J purchases all of the
outstanding stock of D corporation. J has taxable income of $3,000 in 2013 and D has income of $1,000. Under
the “lonely parent rule,” how much of J Corporation’s loss carryover may be used on the consolidated tax
return?
44. In 2001 S, Inc. purchased an investment for $15,000. On January 1, 2012, P Corp. purchased all of the stock
of S. At that time, S’s was worth $11,000. If P and S sell the investment in 2011 and file a consolidated tax
return for 2012, how much is considered to be a built-in loss?
45. B Corporation purchased an investment asset in 2001 for $16,000. On January 1, 2012, C Corporation
purchases all the stock of B. B’s basis in the investment asset at the time of the stock purchase was $9,000. If B
sells the investment in 2012 when B and C filed a consolidated tax return, how much will be considered to be a
built-in deduction?
46. If Q corporation acquires P Corporation in exchange for its stock, and P shareholders own more than 50
percent of the outstanding stock of Q corporation:
47. R, a first-year unaffiliated corporation, had taxable income for 2012 of $180,000. On January 1, 2013, the
affiliated group consisting of Y and Z purchases all the stock of R and files a consolidated return for 2013
showing the following consolidated loss:
Y
$(600,000)
Z
640,000
R
(200,000)
Total
$(160,000)
How much of the group’s loss can be carried back to 2011 and utilized by R?
48. W, an unaffiliated first-year corporation, had taxable income for 2011 of $30,000. In 2012, the X-Y
affiliated group purchased all the stock of W and filed a consolidated return for that year showing the following
loss:
Company
Consolidated Taxable
Income (Loss)
W
$(200,000)
X
450,000
Y
(400,000)
Total
$(150,000)
Compute W’s loss carryover to 2013.
49. At the end of each consolidated return year, the parent’s basis in the stock of a subsidiary must be adjusted
to reflect the economic results of operation. This is accomplished by:
50. P owns 100 percent of S corporation. S in turn owns 100 percent of T corporation. Which of the following
transactions does not constitute a negative basis adjustment to P?
51. On January 1, 2012, P Corporation acquired all the stock of S Corporation for $8,000 and elected to file a
consolidated return. On the acquisition date, S had accumulated earnings and profits of $2,000 and no current
EP for 2012. S distributed $500 to P in 2012. In 2013, S had earnings of $1,300 and in 2014 an operating loss of
$2,100. Determine P’s basis in the S stock as of December 31, 2014.
52. Which one of the following statements is true concerning the filing of a consolidated tax return?
53. A consolidated tax return must be filed on the basis of the common parent’s taxable year. Which of the
following statements is not true?