CH 8: Consolidated Tax Returns

The taxable income of the parent is combined with that of its subsidiaries and one federal tax return is filed for the whole group

consolidated tax return

What is the goal of a consolidated return?

create one return to the IRS instead of one for each owner

What are the advantages of consolidated tax returns?

Losses of some members can offset income of other members and reduce current regular tax
Taxation of intercompany dividends is eliminated
Income on intercompany transactions are deferred
Some deductions and credits can be better utilized (Charitable contribs deduction, foreign tax credits)

What are the disadvantages of consolidated tax returns?

The election is binding on all members for current and all subsequent years
The election may be terminated if: The IRS consents to revocation, or If membership in the group changes and new member is not included in election
Losses on intercompany transactions are deferred
Additional reporting and administrative costs

What are the elements of tax return eligibility?

Member of an affiliated group (80% ownership)
Includable corporation (NOT foreign, tax exempt, insurance)
Meets compliance requirements (Timely election, adoption of parents tax year)

An affiliated group includes one or more chains of ___ connected through stock ownership with a common parent that is an includable corporation

includable corporations

The common parent must directly own 80% of total voting power and value of at least one of the other includable corporations and at least 80% of the total voting power and value of each includable corp (other than the common parent). This stock ownership test must be met:

On EVERY DAY of the tax year

What would you ask the client to prepare to update you on affiliated groups every year?

org chart

The term includable corporation means any corporation except: (6)

Tax exempt corporations under Sect 501
Insurance companies
Foreign Corps
Regulated investment companies
S Corps
Partnerships, trusts, estates, limited liability entities, and other noncorporate entities

Includes income of all members of consolidated group

Form 1120

What is included in the initial consolidated return?

Form 1120
Form 1122
Election

What is included in subsequent years consolidated returns?

Form 851
Estimated tax payments made by any member during the year

represents consent by all entities to be included in consolidated group

Form 1122

election to be included in a group must be made no later than the :

extended due date of parents return for the year

Only in the case of an ___ can the election to consolidate be rescinded once this extended due date passes

inadvertent error

Identifies all group members, shareholdings among members, estimated tax payments, and stock ownership changes

Form 851

Consolidated returns are due:

April 15th

For consolidated returns, you can file for a 6 month extension using

Form 7004

For consolidated returns, each member is __ and _ liable

jointly and severable

In the ___ considlidated tax year, the estimated tax payments must be made on consolidated basis

3rd

Liability for taxes are generally commonly apportioned using a tax sharing agreement which is based on the

relative taxable income or relative tax liability method

Consolidated corps must:

use the tax year of parent and
Accounting methods in place in year of election

Stock basis of a subsidary Initial Basis =

Acquisition price

Stock basis of a subsidiary increases when:

Allocable share of consolidated TI for year
Allocabel share of consolidated operating or capital loss of subsidiary that could not utilize the loss through carryback to a prior year

Stock basis of subsidiary decreases when: (3)

Allocable share of consolidated taxable loss for year
Allocable share of any carryover operating or capital losses that are deducted on the consol return and have not previously reduced stock basis
Dividends paid by sub to parent out of E&P

What are the steps to computing consolidated TI?

Compute separate TI
Adjust each members taxable income (dividends received from other group members, certain intercompany transactions)
Remove items calculated at the group (consolidated) level
Combine the members separate income and losses
Adjust for group items to arrive at consolidated TI

What are the items that are computed on a group (consolidated level) from each memebrs taxable income?

Section 1231 gains and losses
Capital gains or losses
Charitable contribution
NOLs
Divs received from nonmembers

Dividends received from other group members are elimiated from ___

Recipients separate TI

when dividends are rereceived by other members of the group, there is no __ allowed

DRD

If the dividend from another group member is a noncash asset:

Payor member realizes gain but defers recognition until asset leaves the group
The (eliminated) dividend amount = FMV of asset received

Most intercompany transactions remain in the___ because it effectively cancel each other out on a consolidated basis

members separate TI

Services provided by one member to another member results in:

service provider recognizes income
service purchaser recognizes deductible expense
Net result is a zero addition to consolidated TI

When members involved in the intercompany transaction use different accounting methods:

the payors deduction for intercomp exp is deferred until year in which recipient recognizes the related gross income

transactions that are NOT done at arms length

intercompany transactions

Intercompany transactions Matching Rule related to Deferral of gain or loss:

Applies to sales of assets among group members
Gain or loss realized is removed from the TI until the sold asset leaves the group
Prevents accelerating loss deductions on sales of assets within the group

Intercompany transactions Matching Rule related to Recognition of deferral:

Asset is transferred / sold outside of the group
Transferor of property leaves the group
Consolidated election is terminated

What is the goal of the matching rule for intercompany transactions?

Defer gains or losses on intercompany transactions until the assets are sold

All group items are removed from __ bc we use combined taxable income to determine these income, loss, and deduction items

Members separate TI

What are the items computed at the consolidated level (and will therefore be taken out of the separate members TI?

1231 Gain or loss
Net capital gain or loss
Interest expense limiation
capital losses and loss carryforward
Charitable contribution
Net operating losses and loss carryforwards
Dividends received from nonmembers

How do you compute consolidated NOL?

Remove consol char contribs and CG or CL from TI (as have own carryover periods and rules)
Consolidated DRD remains as a part of the consol NOL

NOL rules incurred BEFORE 2018:

Carried Back 2 years
Forward 20

NOL Rules AFTER 2018:

No carryback
Limited to 80% TI
Carried forward indefinitely

Complications with NOLs arise when :

Group members enter or depart from the consolidated group

Members of the consolidated group may change over time, so the consolodated NOL must be apportioned to group members. members apportioned NOL=

Member separate NOL / Member aggreage NOL * consolidated NOL

When a member leaves a group, its apportioned share of unused loss carryforwards can be used:

on its subsequent separate returns

rules that apply when NOLs are carried forward from a separate return year into a consolidated return

Separate return limitation year (SRLY)

The consolidated return can deduct a loss from a member’s FRLY period ONLY to the lessor of its:

CY income
OR Cummulative positive contribution to CY consolidated income

SRLY rules do not apply to the:

parent

Section ___ is the final regulations on SRLY. It states that for positive contributors that are subject to the 80% limitation (e.g. members other than nonlife insurance members), the final regulations modify the SRLY rules to reflect application of the 80% limit, thus generally reducing $100 of income in the SRLY members cumulative register for every $80 of SRLY NOL absorbed by the consolidated group.

Stated another way- the SRLY member must generate $100 of income in order for the consolidated group to absorb $80 of the SRLY NOL

1502

Section ___ adds additional restrictions on usage of NOLs on acquired companies

382