CHAPTER 8 CLASS DISCUSSION PROBLEMS

08-06: List the structural and compliance requirements under Federal income tax law that must be met
before a parent and its affiliates are allowed to file on a consolidated basis. Consider only the
requirements for the group to file its first consolidated return.

08-30: (LO.3) Boulder Corporation owns all of the stock of PebbleCo, so they constitute a Federal
affiliated group and a parent-subsidiary controlled group. By completing the following chart, delineate for
Boulder's tax department some of the effects of an election to file Federal consolidated income tax
returns.

Situation If Consolidated Return Is Filed If Separate Returns Are Filed

a. PebbleCo pays a $1 million
cash dividend to Boulder.

b. Boulder's tax liability is

$95,000, and Pebble's liability
totals $75,000

c. Boulder uses the LIFO

method for its inventories, but
Pebble wants to use FIFO for
its own inventories.
 08-11: Provide the information required to complete the following chart.

Eligible to Join a
Consolidated
Group of Entities Group? Why or Why Not Eligible?
a. Lima City Choral Artists Co-op
(Exempt Entity)

b. Columbus United Health Insurance,

Ltd.

c. Bethke Services, Inc. (US Corp.)

d. Tequila Telefono, organized in El
Salvador

e. Vermont, South Carolina, and Utah

Barber Shops, Inc. (U.S. Corp.)

f. Capital Management Partnership

g. Henry Pontiac Trust

08-24: The Parent consolidated group reports the following results for the tax year.

Entity Income or Loss

Parent $10,000
Sub1 (1,500)
Sub2 4,000
1. What is the group’s consolidated taxable income and consolidated tax liability?

2. If the Parent group has consented to the relative taxable income method, how will the consolidated tax
liability be allocated among the Parent and Subsidiaries 1, 2, and 3?
08-32 & 33: The Chief consolidated group reports the following results for the tax year. Dollar amounts
are listed in millions.

Determine each member's share of the consolidated tax liability. All of the members have consented to
use the relative taxable income method.

08-33: Assume the same facts as in Problem 32, except that the group members have adopted the relative
tax liability tax-sharing method. Use a 21% marginal tax rate.
 08-25: Clifton Corporation acquired all of the outstanding Gillion stock on January 1, year 1, for
$2,400,000. The parties immediately elected to file consolidated Federal income tax returns.

Gillion reported a year 1 taxable loss of $250,000, but it generated $400,000 taxable income in year 2 and
$180,000 in year 3. Gillion paid a $100,000 dividend to Clifton in year 2 and $300,000 in year 3.
Compute Clifton's stock basis in Gillion on the last day of each of the following tax years.

1. Year 1.

2. Year 2.

3. Year 3.
 08-26: Parent and Child Corporations have filed on a consolidated basis since the mid-1970s. The group
reports the following amounts for the current tax year. What is the Parent group's net operating loss for
the year that is available for carryback and carryforward?

Operating loss, including the following $2,500,000

Charitable contributions 600,000
Net capital gain 1,100,000
Dividends received deduction 450,000

08-34-35: Senior, Ltd., acquires all of the stock of JuniorCo for $30 million at the beginning of year 1.
The group immediately elects to file income tax returns on a consolidated basis. Senior's operations
generate a $50 million profit every year. In year 2, JuniorCo pays its parent a $9 million dividend.
Operating results for JuniorCo are as follows.
Tax Year Taxable Income
1 $ 4 million
2 12 million
3 15 million
a. Compute Senior's basis in the JuniorCo stock as of the end of years 1, 2, and 3.
b. Same as part (a), except that JuniorCo's tax year 2 produced a $6 million NOL.
c. Same as part (a), except that JuniorCo's tax year 2 produced a $40 million NOL.

Stock Basis at
End of Tax (a) (b) (c)
Year
1

3
08-36: WhaleCo acquired all of the common stock of MinnowCo early in year 1 for $900,000, and
MinnowCo immediately elected to join WhaleCo's consolidated Federal income tax return. As part of the
takeover, WhaleCo also acquired $300,000 of MinnowCo bonds. The results of MinnowCo for the first
few years of the group operations were reported as follows.

Tax Year Operating Gain/Loss

1 $ 100,000
2 (800,000)
3 (600,000)
Determine WhaleCo's basis in its MinnowCo common stock as of the end of each tax year.
Operating
Tax Year Stock Basis
Gain/(Loss)
1 $100,000

2 ($800,000)

3 ($600,000)

08-37: LO.6Continue with the facts of Problem 36. WhaleCo has determined that it will sell all of its
MinnowCo stock at the end of year 3 for $250,000. Taking into account the rules regarding excess loss
accounts, determine WhaleCo's gain/loss from its sale of the MinnowCo stock.
08-39: (LO.7, 8) Determine consolidated taxable income for the calendar year Yeti Group, which elected
consolidated status immediately upon the creation of the two member corporations on January 1 of year 1.
All recognized income is ordinary in nature, and no intercompany transactions were completed during the
indicated years.

Tax Year Yeti Corporation Snowman Corporation

1 $450,000 $ 70,000
2 450,000 (310,000)
3 450,000 (600,000)
4 450,000 75,000

Year 1

Year 2

Year 3

Year 4

08-40: LO.8Cougar, Jaguar, and Ocelot Corporations have filed on a consolidated, calendar year basis for
many years. At the beginning of the tax year, the group elects to de-consolidate. The group's $6 million
NOL carryforward can be traced in the following manner: one-half to Cougar's operations and one-
quarter each to Jaguar's and Ocelot's. How will Ocelot treat the NOL on its separate tax return?
08-42: LO.8. Child Corporation joined the Thrust consolidated group in year 1. At the time it joined the
group, Child held a $2 million NOL carryforward. On a consolidated basis, the members of Thrust
generated significant profits for many years.

Child's operating results during the first few consolidated return years were as follows. The § 382 rules do
not apply to the group.

Tax Year Taxable Income

1 ($ 100,000)
2 1,600,000
3 1,800,000
How will Child's NOLs affect consolidated taxable income for each of these years? Is any refund
available with respect to the NOL that Child brought into the group? Explain.
 CPA TYPE QUESTIONS
1. Regarding the tax treatment of corporate consolidations, which of the following statements is true?
a) A corporate merger or takeover that qualifies as a corporate reorganization under the Internal
Revenue Code generally receives non-recognition treatment of gains and losses under Code
Section 368.
b) If a C Corporation owns over 80% of an S Corporation, a consolidated tax return must be filed.
c) If a C Corporation owns over 80% of another C Corporation, a consolidated tax return must be
filed.
d) In a corporate takeover that qualifies as a corporate reorganization under the Internal Revenue
Code, the new tax basis of the target’s assets is their fair market value.

2. A corporate group filing a consolidated tax return may

Eliminate taxation of all intercompany Freely elect on a year-by-year basis whether

dividends to file a consolidated return in subsequent
years, subject to certain limitations
a) Yes Yes
b) Yes No
c) No Yes
d) No No

3. Cannoli Corp. is the parent of its subsidiary, Carac Corp., and the corporations have filed
consolidated tax returns since Year 3. In Year 4 Carac sells to Cannoli land worth $90,000 (basis
$50,000) at a selling price of $90,000. In Year 6 Cannoli sells the land to an unrelated third party for
$120,000, its fair market value at that time. What amount of gain is recognized on Cannoli and
Carac’s Year 4 and Year 6 consolidated tax returns, respectively?

Year 4 Year 6
a) $0 $30,000
b) $40,000 $30,000
c) $90,000 $30,000
d) $0 $70,000
4. Khoa Corp., a cash basis taxpayer, and Kalari Corp., an accrual basis taxpayer, are parent-subsidiary
corporations. In January – November of Year 1 Khoa sold $50,000 of supplies to Kalari, which Kalari
paid for on a 1/20 net 30 basis, always paying on Day 20. On 27 December of Year 1 Khoa sells
$10,000 of supplies to Kalari, as per their usual agreement. Before considering Khoa’s December sale
of supplies to Kalari, Khoa’s taxable income is $600,000 and Kalari’s is $120,000. What amount of
taxable income should Khoa and Kalari report on their Year 1 consolidated tax return?

a) $720,000
b) $770,000
c) $74,000
d) $710,000

5. Esrom Corp., a cash basis taxpayer, and Fynbo Corp., an accrual basis taxpayer, are parent-subsidiary
corporations. During Year 3 Esrom bought and paid for $150,000 in supplies from Fynbo.
Additionally, on December 1 of Year 3 the two corporations entered into an agreement whereby
Esrom would provide consulting services to Fynbo, with each month’s services being payable on the
15th of the following month. During December of Year 3 Esrom provided services under this
agreement worth $20,000. Including all of the above transactions, Esrom’s taxable income for the
year amounted to $510,000, while Fynbo’s amounted to $250,000. What amount of taxable income
should Esrom and Fynbo report on their Year 3 consolidated tax return?

a) $760,000
b) $610,000
c) $780,000
d) $630,000