Ch 8 Flashcards
2 options affiliated group has for filing federal income tax returns
1 each member of group can file separate tax return
2 affiliated group can file single consolidated return
Affiliated group of corporations
Parent corporation and all it’s subsidiaries that are at least 80%
Owned by the parent and other subsidiaries in the group
Intercompany transactions
Transaction between 2 corporations that are in same
consolidated group immediately after transaction
3 stock ownership requirements to qualify as affiliated group
1 parent must own at least 80% stock of includible corp.s
2 at least 80% of stock of each corp in group, other than
Parent, must be directly owned by parent or other group members
3 stock owned directly must be both 80% voting stock and total
Value of includible corp’s outstanding stock
6 types of corporations that are not includible in an affiliated group because of their tax status
1 corps exempt from tax under sec. 501 2 life insurance companies subject to tax under sec. 801 3 foreign corps 4 regulated investment companies 5 real estate investment trusts 6 S corporations
Corporations that are not includible, but are subsidiaries of large corporations, do not qualify for what? What must they do?
Don’t qualify as part of affiliated group and must file separate
Tax return
How can a partnership or LLC be a part of an affiliated group?
2) What happens to their income if they are not treated as affiliated group members?
Yes if it elects to be treated as a corporation on the check the box
Regulations
Income and losses of the LLC and partnership pass through to
Each affiliated group member having ownership interest
Which of the 3 control groups can’t file a consolidated return?
Brother sister control groups
Parent subsidiary control group vs. affiliated group: stock ownership requirement
Ps: at least 80% voting power or value
Aff: at least 80% voting power and value
Parent subsidiary control group vs. affiliated group: stock attribution rules
Stock owner by certain related persons is taken into account in
Determining whether controlled group exists
They are not used to determine whether affiliated group exists
Parent subsidiary control group vs. affiliated group: types of corporations excluded
Differ between controlled group and affiliated group
Parent subsidiary control group vs. affiliated group: how often is their definition tested
Definition of controlled group tested only on December 31st
Definition of affiliated group tested each day of the year
Consolidated group
Affiliated group of corporations that file consolidated tax return
Consolidated return year
Corporation’s tax year for which it files consolidated tax return
With other members of affiliated group
Separate tax return year
Corporations tax year for which it files separate tax return
Or files consolidated return with another affiliated group
Accounting period for consolidated tax return of affiliated group
All subsidiary corporations in the group must adopt the parent
Corporation’s tax year
When is income of a parent or subsidiary included in a consolidated tax return?
Entire tax year except for any part of year it was a member of
Another affiliated group
Inter company transactions (sale between 2 divisions in affiliated group) are not included in…
The taxable income on the consolidated tax return
Inter company item
Seller’s income, gain, deduction and loss from inter company transaction
Corresponding item
Buyer’s income, gain, deduction and loss from inter company transaction
or from property acquired in inter company transaction
Recomputed corresponding item
Corresponding item buyer would take into account if seller
And buyer were divisions of single corporation
And transaction occurred btw/those divisions
Matching rule
Gains and losses from sellers transaction and buyer’s transaction
From different divisions in same company aren’t recognized
Til sold to outside party
Must keep track of realized gain/loss of inter company transactions
To know how much gain/loss to recognize
When does the acceleration rule occur
When it is not possible to match sellers inter company item
With buyer’s because either seller or buyer is no longer a
Member of consolidated group
The acceleration rule requires that the consolidated group take into account the seller’s inter company item…
Example of how acceleration rule works?
Immediately before first time it becomes impossible to apply
The matching rule
Ex. If parent sells all of buyer corporations stock, any gain or loss
Buyer has in inter company transactions is included in that years
Income
Gains and losses from installment sales between buyer corp. and third parties
Gains recognized in years installment payments are made
Losses recognized immediately even when installment payments
Will be made in the future
Inter company transaction treatment for performance of services
Similar treatment to inter company property transactions
Equation for seller’s inter company item
Sellers inter company item =
Recomputed corresponding item) - (buyer’s corresponding item
Reporting inter company transactions: separate entity concept
Selling and buying corporations involved in inter company
Transaction generally are treated as separate entities in
Determining income, gain, deduction and loss each one incurs
Under the acceleration rule, how does the consolidated group take into account the selling corporation’s inter company item?
Consolidated group takes selling corp’s inter company item
Into account immediately before time it first becomes impossible
To apply matching rule
4 common situations that can trigger recognition of inter company item
1 buying corp sells to 3rd party
2 buying corp claims depreciation, amortization or depletion
Deductions for property acquired in inter company transaction
3 selling corp or buying corp leaves consolidated group
4 corps in affiliated group discontinue filing consolidated return
Net sec. 1231 gain or loss, how is it computed?
Tax treatment?
Net of gains and losses from sec. 1231 property
Losses treated as ordinary losses, gains usually treated as
LT capital Gains
Charitable contribution carry forward
Limited to 5 years
Capital loss carryover, time periods? What is not allowed?
Carry back 3 years, carry forward 5 years
Not allowed to forego 3 years of capital loss carry back
Capital losses of departing members from affiliated groups
Capital loss no longer belongs to the affiliated group but to
The departing corp
Dividends received deduction: limitation on dividends from non group members to consolidated group members
Dividends received deduction limited to lesser of dividends
Received from within consolidated group
Or dividends received from non group members
Are dividends received from members of same affiliated group entitled to dividends received deduction?
Not if affiliated group files consolidated tax return
because Inter company dividends are excluded from distributee member Corp’s gross income
Consolidated group can’t claim 100% dividends received deduction for…
Excluded dividend
If corporations in affiliated group do not file consolidated tax return, how is a dividend received deduction treated on the distributee corporation’s separate tax return?
How is it treated from a non includible corporation (insurance company)?
Distributee corporation can claim 100% dividends received
deduction in both cases
Expanded affiliated group
Includes corporations that are eligible to file consolidated return
In same affiliated group and 51% owned subsidiaries
Unlike a 70% or 80% dividends received deduction, The 100% dividends received deduction is not subject to…
The taxable income limitation
A consolidated group can claim all tax credits available to…
Corporate tax payers
2 major tax credits
1 General business credit
2 foreign tax credit
How does consolidated group determine its general business credit?
On consolidated basis, combining its members separate credit
Amounts into single amount
Limitation of general business credit claimed by consolidated group: limited to consolidated group’s net income tax to greater of 2 things
1 its consolidated tentative minimum tax
Or
2) 25% of its consolidated net regular tax liability exceeding
$25,000
General business credit carryover
Any credit exceeding limitation carries back 1 year and forward
20 years
What elections can a parent corporation make with foreign taxes? 2
1 elect to claim a deduction
Or
2 elect to claim credit for group’s foreign taxes
Consolidated group foreign tax limitation: what 3 factors are taken into account?
Consolidated group takes into account consolidated foreign source income, consolidated taxable income, consolidated regular tax
Estimated tax payments of consolidated groups: first 2 years
In first 2 years affiliated group may file on separate or
consolidated Basis
Large corporation rule
Applies to corp whose taxable income is over $1 million
In any 3 proceeding years
Separate basis vs. consolidated basis of estimated payments
Separate bias can reduce estimated payments, but cause
Group to make larger payment on tax due date
Advantage of consolidated tax return: NOL
Can offset one consolidated group members NOL with other
Group member
Consolidated NOL
Carries back 2 years and forward 20 years
If an affiliated group takes on a new member with an NOL
The affiliated group can receive the tax benefits from the new
members NOL in their consolidated income if they file a
Consolidated return instead of separate
Current year NOL
Current year NOL must be used to offset current year profits
Before it can be carried back or carried forward
NOL carry backs and carry forwards: what election can parent corporation make?
Parent corp. can elect to relinquish NOL carry back and just
Use the carry forward for 20 years
NOL for departing member of affiliated group
Affiliated group has right to use departing member’s NOL in
The tax year the member leaves
If any NOL remains, it goes with the departing member
CRY and SRY, what are they acronyms for?
Consolidated return year
Separate Return Year
When must a consolidated group member adjust basis of stock
It owns?
Annually
What is the effect of positive stock basis adjustments for consolidated groups?
Reduce amount of gain or increase amount of loss reported
When sale of stock of consolidated group member (other than
Parent) occurs
First tier subsidiary
Second tier subsidiary
First: subsidiary of parent
2nd: subsidiary of subsidiary
Basis needs to be adjusted when…
Example
Income is recognized, so the income won’t be taxed twice
Ex. If you have a $500k basis in a subsidiary and that subsidiary
Makes $50k and pays 17k in tax
Your adjusted basis = $533k (500 + 50 - 17)
Adjusted basis: excess loss account on subsidiaries
Large negative bias adjustments reduce basis in subsidiary
Stock to 0
Additional negative basis adjustment create excess loss account,
Which does not trigger recognition of income until subsidiary is
Sold
