Chapter 8: Homework

Question 1

You are making a presentation to the board of directors of HugeCo about the merits of acquiring Bitty, Ltd., an important supplier. One board member, knowing that you are a tax specialist, asks you to list some of the nontax reasons to make the acquisition.

Select either “Yes” or “No” to indicate whether the following items would be nontax reasons to make the acquisition.

Isolating the assets of one corporation from the liabilities of another.

Answer 1

Yes

For the most part, nontax motivations provide the strongest incentives for multiple-corporation acquisitions and holdings.

Question 2

Retaining the separate identities of acquired corporations.

Answer 2

Yes

For the most part, nontax motivations provide the strongest incentives for multiple-corporation acquisitions and holdings.

Question 3

Shielding the identities of a subsidiary’s true owners from the public.

Answer 3

Yes

For the most part, nontax motivations provide the strongest incentives for multiple-corporation acquisitions and holdings.

Question 4

Avoiding the use of generally accepted accounting principles for the financial statements.

Answer 4

No

For the most part, nontax motivations provide the strongest incentives for multiple-corporation acquisitions and holdings.

Question 5

A desire to move an affiliate from control of its activities in a “business unfriendly” state to that of its new parent entity, which is resident in a “business friendly” jurisdiction.

Answer 5

Yes

For the most part, nontax motivations provide the strongest incentives for multiple-corporation acquisitions and holdings.

Question 6

Executing estate planning objectives.

Answer 6

Yes

For the most part, nontax motivations provide the strongest incentives for multiple-corporation acquisitions and holdings.

Question 7

he tax rules governing the Federal consolidated tax return elections are largely in the form of Treasury Regulations.

Complete the following sentences regarding when the split between the legislative and executive branches in tax-writing responsibilities is appropriate or inappropriate.

The Code provisions dealing with consolidated returns are strictly definitional in nature and broad in scope, while the related
Regulations dictate the computational and compliance requirements of the group. Therefore, the length and details of the rules associated with consolidated returns make them poorly suited for placement in the Code. Moreover, as corporate structures and transactions become more complex, the expertise of Treasury staffers is critical in drafting Regulations. Unelected individuals should not be charged with writing tax law. The public review process for the consolidated return Regulations must remain thorough, to protect against abuses and unintended consequences.

Answer 7

Code Provisions
Regulations
Poorly Suited
Trasury Staffers
Should Not
Public

Question 8

Financial accounting rules do not always match the tax treatment of transactions involving groups of affiliated U.S. corporations.

Indicate whether the following treatments are “Financial Accounting” or “Tax”.

Included corporations:

Consolidated financial statements can include non-U.S. corporations and noncorporate entities.

Answer 8

Financial accounting

Both U.S. financial accounting and tax rules use the term consolidation, but there is only a slight resemblance in the content of those rules. On page 1 of the Form 1120 Schedule M-3, the consolidated group reconciles its GAAP income with the taxable income that is reported on the consolidated return.

Question 9

Included corporations:

Consolidated tax returns can include only U.S. C corporations.

Answer 9

Tax

Both U.S. financial accounting and tax rules use the term consolidation, but there is only a slight resemblance in the content of those rules. On page 1 of the Form 1120 Schedule M-3, the consolidated group reconciles its GAAP income with the taxable income that is reported on the consolidated return.

Question 10

Adjusting for intercompany transactions:

The tax rules generally only require recognizing intercompany transactions that affect taxable income.

Answer 10

Tax

Both U.S. financial accounting and tax rules use the term consolidation, but there is only a slight resemblance in the content of those rules. On page 1 of the Form 1120 Schedule M-3, the consolidated group reconciles its GAAP income with the taxable income that is reported on the consolidated return.

Question 11

Adjusting for intercompany transactions:

GAAP requires adjusting for all intercompany transactions.

Answer 11

Financial Accounting

Both U.S. financial accounting and tax rules use the term consolidation, but there is only a slight resemblance in the content of those rules. On page 1 of the Form 1120 Schedule M-3, the consolidated group reconciles its GAAP income with the taxable income that is reported on the consolidated return.

Question 12

An acquirer that takes over its target organization:

The transaction is treated as a purchase, with cost amounts marked up or down to fair market value (FMV).

Answer 12

Financial Accounting

Both U.S. financial accounting and tax rules use the term consolidation, but there is only a slight resemblance in the content of those rules. On page 1 of the Form 1120 Schedule M-3, the consolidated group reconciles its GAAP income with the taxable income that is reported on the consolidated return.

Question 13

An acquirer that takes over its target organization:

The deal is nontaxable, with a carryover basis, if the transaction is a qualifying reorganization or a stock purchase. A taxable asset purchase results in a FMV tax basis for purchased assets.

Answer 13

Tax

Both U.S. financial accounting and tax rules use the term consolidation, but there is only a slight resemblance in the content of those rules. On page 1 of the Form 1120 Schedule M-3, the consolidated group reconciles its GAAP income with the taxable income that is reported on the consolidated return.

Question 14

A purchase price that exceeds the sum of the net assets acquired:

The difference is goodwill. Firms generally amortize purchased goodwill over 15 years.

Answer 14

Tax

Both U.S. financial accounting and tax rules use the term consolidation, but there is only a slight resemblance in the content of those rules. On page 1 of the Form 1120 Schedule M-3, the consolidated group reconciles its GAAP income with the taxable income that is reported on the consolidated return.

Question 15

A purchase price that exceeds the sum of the net assets acquired:

The difference is goodwill. No scheduled amortization for public firms. Instead, they record impairments or restorations of goodwill on the income statement and balance sheet. Private firms can elect to amortize over 10 years or less and avoid impairment testing. [ASC 350−20−35−62]

Answer 15

Financial Accounting

Both U.S. financial accounting and tax rules use the term consolidation, but there is only a slight resemblance in the content of those rules. On page 1 of the Form 1120 Schedule M-3, the consolidated group reconciles its GAAP income with the taxable income that is reported on the consolidated return.

Question 16

Inclusion ownership threshold:

Greater than 50% ownership generally results in required consolidation.

Answer 16

Financial Accounting

Both U.S. financial accounting and tax rules use the term consolidation, but there is only a slight resemblance in the content of those rules. On page 1 of the Form 1120 Schedule M-3, the consolidated group reconciles its GAAP income with the taxable income that is reported on the consolidated return.

Question 17

Inclusion ownership threshold:

Consolidation requires 80% or greater stock ownership.

Answer 17

Tax

Both U.S. financial accounting and tax rules use the term consolidation, but there is only a slight resemblance in the content of those rules. On page 1 of the Form 1120 Schedule M-3, the consolidated group reconciles its GAAP income with the taxable income that is reported on the consolidated return.

Question 18

Considering only the requirements under Federal income tax law that must be met before a parent and its affiliates can file its first consolidated return, complete the statements below that outline the requirements of the parent and its affiliates.

Before a consolidation election can be made under the tax law, the three major requirements that first must be met are
Affiliated group status, Eligible corporation to join consolidated group, Compliance requirements.

All of the members of a corporate group must meet the requirements to be eligible to elect, and maintain the right to file a consolidated income tax return.

A corporation can join in a consolidated tax return if it is a member of
an affiliated group. Both the 80% stock ownership test and the structure test of an identifiable parent entity must be met.

A Form 1122 should be attached to the first consolidated tax return for each of the subsidiaries included in the group. This form represents a consent by the affiliate to be included in the consolidated group.

Answer 18

Affiliated group status, Eligible corporation to join consolidated group, Compliance requirements.
- All
- an affiliated
- 80%
- Parent
- Form 1122
- Affiliate

A corporation can join in a consolidated tax return if it meets three requirements.

Question 19

Select either “Yes” or “No” to indicate whether each listed entity is eligible to join a consolidated group.

Lima City Choral Artists Co-op

Answer 19

No

The Code lists a number of corporations that may not use a consolidated return to report their taxable income.

Question 20

Select either “Yes” or “No” to indicate whether each listed entity is eligible to join a consolidated group.

Bethke Services, Inc.

Answer 20

Yes

The Code lists a number of corporations that may not use a consolidated return to report their taxable income.

Question 21

Select either “Yes” or “No” to indicate whether each listed entity is eligible to join a consolidated group.

Tequila Teléfono, organized in El Salvador

Answer 21

No

The Code lists a number of corporations that may not use a consolidated return to report their taxable income.

Question 22

Select either “Yes” or “No” to indicate whether each listed entity is eligible to join a consolidated group.

Vermont, South Carolina, and Utah Barber Shops, Inc.

Answer 22

Yes

The Code lists a number of corporations that may not use a consolidated return to report their taxable income.

Question 23

Select either “Yes” or “No” to indicate whether each listed entity is eligible to join a consolidated group.

Capital Management Partnership

Answer 23

No

The Code lists a number of corporations that may not use a consolidated return to report their taxable income.

Question 24

Select either “Yes” or “No” to indicate whether each listed entity is eligible to join a consolidated group.

Henry Pérez Trust

Answer 24

No

The Code lists a number of corporations that may not use a consolidated return to report their taxable income.

Question 25

The consolidated tax liability for most affiliated groups is assigned among the parent and its subsidiaries—each entity is responsible for "its share" of the tax. The Regulations allow several methods to be used to compute these allocations. In this context, define the two most commonly encountered tax-sharing methods used by Federal consolidated tax return groups. Complete the statements below regarding when a subsidiary corporation would prefer one method over another. a. Under the relative taxable income method, the consolidated tax liability is allocated among the members based on the amounts of their separate taxable income. b. Under the relative tax liability method, the allocation is based on the hypothetical separate tax liabilities of the affiliates. Therefore, an affiliated subsidiary that reports an operating loss for the tax year would prefer the relative taxable income method and an affiliated subsidiary that is the source of large tax credits for the year would prefer the relative tax liability method.

Answer 25

- allocated among - amounts of their separate - hypothetical separate - the relative taxable income method - the relative tax liablity method ## Footnote Benefits accruing from the Federal corporate income tax liabilities are apportioned equally among the group members unless all members consent to some other method through an annual election. There are two commonly used tax-sharing agreement methods.