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Prentice Hall's Federal Taxation 2014 Corporations, 27e
Chapter C8 Consolidated Tax Returns
1) To be an affiliated group, the parent corporation must directly own at least 80% of another group
member.
Answer: TRUE
Page Ref.: C:8-2
Objective: 1
2) A Canadian subsidiary cannot file as part of the consolidated group with its U.S. parent.
Answer: FALSE
Page Ref.: C:8-5 through C:8-6
Objective: 1
3) Brother-sister controlled groups can elect to file a consolidated tax return.

Answer: FALSE
Page Ref.: C:8-4
Objective: 1
4) An advantage of filing a consolidated return is that losses of one affiliated group member may be offset
against the taxable income of other group members in the same tax year.
Answer: TRUE
Page Ref.: C:8-36
Objective: 8
5) The election to file a consolidated return is made annually.

Answer: FALSE
Page Ref.: C:8-5
Objective: 2
6) A separate return year is a corporation's tax year for which it files a separate tax return or files a
consolidated tax return with another affiliated group.
Answer: TRUE
Page Ref.: C:8-5
Objective: 2
7) P and S are members of an affiliated group that has filed consolidated tax returns for a number of
years. The sale of inventory by P that was acquired from S in an intercompany transaction outside the
affiliated group triggers the recognition of gain by S.
Answer: TRUE
Page Ref.: C:8-18
Objective: 2
8) Intercompany dividends and undistributed subsidiary earnings do not create temporary differences
for affiliated companies filing a consolidated return.
Answer: TRUE
Page Ref.: C:8-21
Objective: 4
1
Copyright © 2014 Pearson Education, Inc.
9) A member's portion of a consolidated NOL may be carried back against that member's taxable income
from the preceding two separate return years.
Answer: TRUE
Page Ref.: C:8-30
Objective: 6
10) The treatment of capital loss carrybacks and carryovers is similar to NOLs.
Answer: TRUE
Page Ref.: C:8-28
Objective: 5
11) The IRS can attempt to collect taxes owed on a consolidated return from any of the members of the
consolidated group.
Answer: TRUE
Page Ref.: C:8-39
Objective: 9
12) Intercompany sales between members of an affiliated group filing separate returns cause deferred tax
assets to be recognized by both buyer and seller.
Answer: FALSE
Page Ref.: C:8-10
Objective: 4
13) Identify which of the following statements is true.

A) To be part of an affiliated group, a corporation must be at least 80% directly owned by another group
member.
B) Only common stock is considered when determining if the 80% ownership test is met for affiliated
group eligibility.
C) An affiliated group electing to file a consolidated return may be composed of as few as two
corporations.
D) All of the above are false.
Answer: C
Page Ref.: C:8-2 and C:8-3
Objective: 1
14) Which of the following corporations is an includible corporation for purposes of filing a consolidated
tax return?
A) insurance companies
B) S corporations
C) car manufacturing corporation
D) foreign corporations
Answer: C
Page Ref.: C:8-3
Objective: 1
2
15) Diana Corporation owns stock of Tomika Corporation. For Diana and Tomika to qualify for the filing
of consolidated returns, at least what percentage of Tomika's total voting power and total value of stock
must be directly owned by Diana?
A)
Total voting power Total Value of stock
51% 51%
B)
51% 80%
C)
80% 51%
D)
80% 80%
Answer: D
Page Ref.: C:8-3
Objective: 1
16) Ajak Corporation owns 85% of the single class of Utech Corporation stock. Utech Corporation owns
35% of Tech Corporation. Ajak Corporation also owns 50% of Tech Corporation, and Tech Corporation
owns 75% of Baxter Corporation.
A) Ajak, Tech, Utech, and Baxter Corporations are an affiliated group.
B) Ajak, Tech, and Baxter Corporations are an affiliated group.
C) Ajak, Tech, and Utech Corporations are an affiliated group.
D) None of the above are correct.
Answer: C
Page Ref.: C:8-3
Objective: 1
17) Which of the following corporations is entitled to join in a consolidated tax return without making a
special election?
A) corporations exempt from tax under Sec. 501
B) real estate investment trusts
C) closely held corporations
D) foreign corporations
Answer: C
Page Ref.: C:8-3
Objective: 1
3
A) If 100% of the stock of two corporations is owned by the same individual, the two corporations are
eligible to file a consolidated return.
B) The check-the-box regulations permit partnership and LLCs to elect C corporation tax treatment.
C) A group of corporations that meets the parent-subsidiary controlled group requirements is always
eligible to file a consolidated return.
Answer: B
Page Ref.: C:8-4
Objective: 1

A) When a new corporation joins an affiliated group, all of its income and expense items for the tax year,
including the acquisition date, must be allocated between the separate tax return and consolidated tax
return that are to be filed based on the number of days included in each of the two tax years.
B) A consolidated return election may be revoked after 5 years.
C) All members of a consolidated group must use the same tax year.
Answer: C
Objective: 3

A) Corporations that join in a consolidated return must adopt the same tax year as the parent corporation.
B) Permission to discontinue the filing of consolidated tax returns is sometimes granted by the IRS.
C) Additional administrative costs may be incurred when filing a consolidated tax return.
D) All of the above are true.
Answer: D
Objective: 2

A) A corporation may be required to file a separate return and file with an affiliated group in the same
calendar year.
B) When a corporation joins in filing a consolidated return, taxable income of the member is combined
with other members' taxable income prior to any adjustments.
C) If a corporation becomes a member of an affiliated group within the first thirty days of the
corporation's tax year, the corporation can elect not to file a short-period tax return.
Answer: A
Objective: 3
4
22) Cardinal and Bluebird Corporations both use a calendar year as their tax year. At the close of business
on June 30, Cardinal Corporation buys all of Bluebird Corporation's stock. If the two corporations file a
consolidated return and both corporations earn their income evenly throughout the year, what portion of
Cardinal's income will be included in the consolidated return? (Assume all months have 30 days.)
A) 100%
B) 50%
C) 0%
D) none of the above
Answer: A
Page Ref.: C:8-5; Example C:8-6
Objective: 2
23) Cardinal and Bluebird Corporations both use a calendar year as their tax year. At the close of business
on June 30, Cardinal Corporation buys all of Bluebird Corporation's stock. If the two corporations file a
consolidated return and both corporations earn their income evenly throughout the year, what portion of
Bluebird's income will be included in the consolidated return? (Assume all months have 30 days.)
A) 100%
B) 50%
C) 0%
Answer: B
Objective: 2
24) Parent Corporation owns all of the stock of Richards and Smith Corporations on January 1. The three
corporations have filed consolidated tax returns for a number of calendar years. Parent sells all of the
stock of Richards Corporation on June 1. Parent purchases all of the stock of Taylor Corporation on
September 1. Parent sells all of the stock of Smith Corporation on November 1. When does the affiliated
group terminate?
A) June 1
B) September 1
C) November 1
D) The original affiliated group does not terminate.
Answer: D
Page Ref.: C:8-5
Objective: 2
5
25) Alto and Bass Corporations have filed consolidated tax returns for several calendar years. At the close
of business on September 30, Alto Corporation sells all of the Bass Corporation stock. What portion of
Alto's and Bass's income for the current year will be included in the consolidated return, assuming its
income is earned evenly throughout the year and all months have 30 days?
A)
Alto Bass
100% 100%
B)
Alto Bass
100% 75%
C)
Alto Bass
75% 75%

Answer: B
Page Ref.: C:8-5
Objective: 2
26) Which of the following statements is incorrect with respect to the consolidated alternative minimum
tax?
A) The starting point for the consolidated alternative minimum taxable income computation is
consolidated taxable income before the NOL deduction.
B) The difference between the consolidated ACE amount and the consolidated preadjustment AMTI is an
adjustment to consolidated taxable income in arriving at AMTI.
C) Each corporation is permitted its own $40,000 statutory exemption.
D) If the consolidated tentative minimum tax is smaller than the consolidated regular tax, there is no
alternative minimum tax liability.
Answer: C
Page Ref.: C:8-24
Objective: 5

A) The corporate AMT is determined on a separate return basis and then consolidated.
B) All corporations filing consolidated tax returns are subject to the AMT.
C) Alternative minimum tax payments from prior consolidated return years that are attributable to
timing or permanent differences can be carried over by the affiliated group and claimed as a credit on
current or future consolidated returns.
Answer: C
Page Ref.: C:8-24
Objective: 5
6
28) Which of the following statements is incorrect with respect to the consolidated alternative minimum
tax?
A) A separate alternative minimum taxable income computation is made for each individual group
member. These amounts are then totaled to arrive at consolidated alternative minimum taxable income.
B) Positive adjustments that are made with respect to one group member can be offset by negative
adjustments that are made with respect to another group member in computing consolidated alternative
minimum taxable income.
C) The affiliated group's alternative minimum tax payment is available as a credit against its regular tax
amount in future tax years.
D) The estimated tax payment rules apply to the alternative minimum tax.
Answer: A
Page Ref.: C:8-24
Objective: 5
29) Which of the following statements is true?

A) A consolidated group determines its general business credit on a consolidated basis.
B) The general business credit can be carried back 3 years and forward 15 years.
C) The general business credit can be carried forward indefinitely.
D) The general business credit can not be carried forward or backward.
Answer: A
Page Ref.: C:8-25
Objective: 5
30) The Alpha-Beta affiliated group has a consolidated regular tax amount of $52,000 and a tentative
minimum tax amount of $50,000 in the current year. The maximum general business credit that can be
used on the consolidated return is
A) $2,000.
B) $6,750.
C) $50,000.
Answer: A
Explanation: A) The general business credit that can be used equals the group's net income tax ($52,000)
minus the larger of (1) tentative minimum tax ($50,000), or (2) 25% of net income tax in excess of $25,000
($6,750) or $2,000 ($52,000 - $50,000).
Objective: 5
31) Identify which of the following statements is false.

A) A corresponding item includes the income, gain, deduction, or loss amount reported by the buyer
from an intercompany transaction, or from property acquired in an intercompany transaction.
B) Affiliated groups of corporations filing a consolidated tax return are not eligible for the small
corporation exemption from the corporate alternative minimum tax.
C) An intercompany transaction generally results in the selling member and buying member in a
property transaction being treated as divisions of a single corporation.
D) Intercompany dividends and undistributed subsidiary earnings do not create temporary differences
for affiliated companies filing a consolidated return.
Answer: B
Page Ref.: C:8-24
Objective: 5
7
A) Unused general business credit carryforwards, which originate in a consolidated return year, are
absorbed in a FIFO manner, beginning with the earliest ending tax year.
B) An intercompany transaction is a transaction that takes place between two corporations that are
members of the same affiliated group immediately after the transaction.
C) An intercompany item includes income reported by the seller on the providing of services by one
group member to another group member and the gain/loss reported by the seller on the sale of property
to another group member.
Answer: C
Objective: 4
33) Ajax and Brindel Corporations have filed consolidated returns for several calendar years. Ajax
acquires land for $60,000 on January 1 of last year. On September 1 of this year, Ajax sells the land to
Brindel for $90,000. The basis and holding period for the land acquired by Brindel are:
A)
Basis Holding Period Begins On
$60,000 January 2 of last year
B)
$90,000 January 2 of last year
C)
$90,000 September 2 of this year

Answer: C
Page Ref.: C:8-10
Objective: 4
34) Which of the following events is an intercompany transaction?

A) a capital contribution
B) accrual of interest on a loan made by one group member to another group member; both group
members use the accrual method of accounting
C) dividend payment received from a subsidiary corporation to its parent corporation; the subsidiary
corporation is not an includible corporation
D) a parent corporation's sale of stock of a subsidiary corporation to a nonmember of the group
Answer: B
Page Ref.: C:8-10
Objective: 5
8
35) Subsidiary Corporation purchases a used machine from Parent Corporation in an intercompany
transaction. Which of the following events is a corresponding event for the intercompany transaction?
A) the purchasing group member depreciating the machine
B) the purchasing group member selling the machine for cash to a nonmember of the group
C) the departure of the purchasing group member from the affiliated group when its stock is sold to a
nonmember of the group
D) All of the above are recognition events.
Answer: D
Objective: 4
36) Which of the following events is an intercompany transaction that requires the deferral and later
recognition of income?
A) accrual of rentals on a lease of real property owned by one group member that is used by another
group member; both group members use the accrual method of accounting
B) cash dividend payment from a subsidiary corporation to its parent corporation
C) sale of inventory from a subsidiary corporation to its parent corporation
D) None of the above transactions require the deferral and later recognition of income.
Answer: C
Page Ref.: C:8-9
Objective: 4

A) Inventory sales between group members are an example of an intercompany transaction.
B) The basis to the purchasing member of property acquired in an intercompany transaction is the
amount of cash paid to the selling member.
C) The holding period for property acquired in an intercompany transaction begins when the
corresponding item is reported.
D) In general, buyers and sellers engaging in an intercompany transaction are treated as separate entities.
Answer: C
Objective: 4

A) The basic accounting method elections that are used by the seller in intercompany transactions do not
override the intercompany transaction rules.
B) P and S are members of an affiliated group that has filed consolidated tax returns for a number of
years. The sale of inventory by P, which was acquired from S in an intercompany transaction, outside the
affiliated group triggers the restoration of gain by S.
C) Last year, P, S, and T Corporations have filed consolidated tax returns for a number of years. Last year
P Corporation sold land (a Sec. 1231 asset) to T at a $75,000 profit. The gain was deferred by P in last
year's consolidated tax return. P sold the T stock to Mike on June 1 of this year. The stock sale will require
P to report in its income the gain that was deferred on the land sale.
Answer: D
Objective: 3
9
39) Parent Corporation sells land (a capital asset) to Subsidiary Corporation in an intercompany
transaction, realizing a $25,000 gain. Subsidiary uses the land for five years in its trade or business before
selling the land to a nonmember of the group in a cash sale in which a $50,000 gain is realized. Which
statement is correct?
A) A $25,000 capital gain is included in consolidated taxable income when Parent sells the land to
Subsidiary Corporation. A $50,000 Sec. 1231 gain is included in consolidated taxable income when
Subsidiary sells the land.
B) A $25,000 capital gain and a $50,000 Sec. 1231 gain are included in consolidated taxable income when
C) A $75,000 Sec. 1231 gain ($25,000 from Parent and $50,000 from Subsidiary) is included in consolidated
taxable income in the year Subsidiary sells the land (assuming no recapture of previously deducted Sec.
1231 losses must occur).
D) None of the above are correct.
Answer: C
Explanation: C) The recomputed gain is $75,000 of Sec. 1231 gain. $50,000 of gain is reported by
Subsidiary. $25,000 is reported by Parent. Both Sec. 1231 gains are reported in the year of Subsidiary's
sale. The $25,000 amount reported by Parent is a restoration that reflects the fact that $25,000 was
included in Parent's separate taxable income in the year of the original sale to Subsidiary, which was
deferred when determining the group's consolidated taxable income.
Page Ref.: C:8-12
Objective: 4
40) Apple Corporation and Banana Corporation file consolidated returns. In January 2007, Apple sold
Banana property with a basis of $120,000 for its fair value of $150,000. Banana sold the property to an
unrelated party in April 2008 for $200,000. What amount of gain should be reported for these transactions
in the consolidated returns for 2011 and 2012?
A)
2007 2008
$30,000 $50,000
B)
2007 2008
$0 $50,000
C)
2007 2008
$30,000 $80,000
D)
2007 2008
$0 $80,000
Answer: D
Page Ref.: C:8-12
Objective: 4
10
41) Parent Corporation sells land (a capital asset) to Subsidiary Corporation in an intercompany
transaction, recognizing a $25,000 gain. Subsidiary holds the land as an investment for five years before
selling the land to a nonmember of the group on an installment basis in a sale in which a $50,000 gain is
realized. The sales proceeds are collectible in four equal installments with an appropriate interest amount
being charged to the purchaser. Which statement is correct?
A) A $25,000 capital gain is included in consolidated taxable income when Parent sells the land to
Subsidiary Corporation. A $50,000 capital gain is included in consolidated taxable income when
B) A $25,000 capital gain from Parent and a $50,000 capital gain from Subsidiary are included in
consolidated taxable income when Subsidiary sells the land.
C) The $25,000 capital gain from Parent and $50,000 capital gain from Subsidiary are included ratably in
consolidated taxable income, commencing in the year the first installment is received.
D) None of the above are correct
Answer: D
Explanation: D) The recomputed gain is $75,000 of capital gain. $15,000 ($75,000/5) of the recomputed
gain is recognized as each installment is collected. $10,000 of this gain is reported by Subsidiary and
$5,000 by Parent as each installment is collected. The $25,000 amount reported by Parent is a restoration
that reflects the fact that $25,000 was included in Parent's separate taxable income in the year of the
original sale to Subsidiary, which was deferred when determining the group's consolidated taxable
income.
Objective: 4
42) Parent and Subsidiary Corporations have filed calendar-year consolidated tax returns for several
years. Parent Corporation uses the cash method of accounting while Subsidiary Corporation uses the
accrual method of accounting. If Parent lends Subsidiary money,
A) the interest expense is deductible when accrued.
B) the interest expense and interest income may be reported in different consolidated return years.
C) the interest income is reported when the interest expense is accrued by Subsidiary.
D) the interest expense deduction is taken when Parent reports the interest income.
Answer: C
Objective: 4

A) P Corporation receives a dividend from its 100%-owned subsidiary corporation S. P and S have filed
consolidated tax returns for a number of years. The dividend payment is out of S's earnings and profits
and reduces P's investment in S. The dividend is an intercompany transaction and excluded from P's
gross income.
B) The consolidated dividends-received deduction percentage for dividends received by one affiliated
group member from another affiliated group member is always 100%.
C) The dividends-received deduction claimed when a $50,000 dividend is received from a 100%-owned
nonconsolidated life insurance company is $35,000 (ignoring any dividends-received deduction
limitations).
Answer: A
Page Ref.: C:8-21
Objective: 4
11
A) A shareholder corporation that receives a nondividend distribution from an affiliated group member
is not required to recognize a gain when the distribution amount exceeds the shareholder's basis in the
distributing corporation's stock.
B) The dividends-received deduction limitation for dividends received by members of an affiliated group
from nonmembers is applied to the separate taxable income of each group member.
C) The dividends-received deduction cannot be taken in full on a consolidated return if the deduction
amount creates or increases a consolidated NOL.
Answer: A
Page Ref.: C:8-21
Objective: 4

A) The charitable contribution deduction is calculated on a separate return basis for each group member,
and the separate company deductions of the individual group members are totaled to arrive at the
consolidated deduction.
B) An affiliated group member cannot carry over any unused charitable contribution deduction from a
consolidated return year to a separate return year if the member leaves the group prior to the end of the
current consolidated return year.
C) Charitable contributions, which cannot be deducted in a consolidated return due to the 10% deduction
limitation, can be carried forward indefinitely by the affiliated group.
Answer: D
Page Ref.: C:8-19
Objective: 5

A) The basic dividends-received deduction rules generally do not apply to the calculation of the
consolidated dividends-received deduction.
B) A member of an affiliated group can elect to carry back its own separate return losses from a
consolidated return year to one of its earlier profitable separate return years.
C) A consolidated NOL is computed in part by including the consolidated capital gain in taxable income.
Answer: C
Objective: 6
47) Which of the following intercompany transactions creates temporary book/tax differences when a
parent corporation owns 100% of a subsidiary's stock and the companies file a consolidated return?
A) intercompany dividends
B) undistributed subsidiary earnings
C) intercompany sale
D) None of the above items create temporary differences.
Answer: D
Page Ref.: C:8-39
Objective: 10
12
48) Which of the following statements is true?
A) The definition of an affiliated group is the same for purposes of calculating the U.S. production
activities deduction as it is for filing a consolidated return.
B) The consolidated charitable contributions deduction is limited to 10% of adjusted consolidated taxable
income, without regard to the consolidated DRD, consolidated NOL carrybacks, consolidated capital loss
carrybacks, and consolidated charitable contributions deduction.
C) The definition of an affiliated group for purposes of the U.S. production activities deduction uses a
60% ownership threshold.
D) All of the above are true statements.
Answer: B
Objective: 5
49) Parent and Subsidiary Corporations form an affiliated group. Last year, the initial year of operation,
Parent and Subsidiary filed separate returns. This year, the group files a consolidated tax return. The
results for last year and the current year are:
Taxable Income
Last Current
Parent ($10,000) $50,000
Subsidiary 30,000 (25,000)
How much of Subsidiary's loss can be carried back to last year?

A) $0
B) $20,000
C) $25,000
Answer: A
Objective: 6
50) Parent and Subsidiary Corporations form an affiliated group. Last year, the initial year of operation,
Parent and Subsidiary filed separate returns. This year. the group files a consolidated return.
Taxable Income
Last Current
Parent ($16,000) $20,000
Subsidiary 10,000 (21,000)
How much of the Subsidiary loss can be carried back to last year?
A) $0
B) $1,000
C) $10,000
Answer: B
Objective: 6
13
A) The parent corporation may elect that the affiliated group use its NOL as a carryforward only.
B) A portion of a consolidated NOL can be carried back or forward to a separate return year of an
individual group member.
C) The entire consolidated NOL may be available as a carryback or a carryover to a separate return year
of one of the members of an affiliated group.
Answer: D
Objective: 6
52) Mako and Snufco Corporations are affiliated and have filed consolidated returns for the past three
years. Mako acquired 100% of Zebco stock on January 1 of last year, the date of Zebco's formation. Mako,
Snufco, and Zebco, who have filed consolidated returns for last year and the current year, report the
following taxable incomes.
Taxable Income Taxable Income

Corporation
Last year Current year
Mako $18,000 $ 12,000
Snufco 9,000 8,000
Zebco (25,000) (35,000)
CTI $ 2,000 ($15,000)
The $15,000 consolidated NOL reported in the current year

A) cannot be carried back.
B) can be carried back three years ago only.
C) can be carried back to last year and the remainder, if any, carried forward to subsequent years.
D) can only be used in future years.
Answer: C
Explanation: C) The loss can be used to offset the income of Mako and Snufco.
Objective: 6
14
53) Pants and Skirt Corporations are affiliated and have filed consolidated tax returns for the past three
years. Pants acquires 100% of Zipper stock on January 1 of this year. Zipper Corporation filed separate
returns previously. Pants, Skirt, and Zipper filed a consolidated return for the current year and reported
the following taxable incomes:

Corporation
Pants $18,000 $ 12,000
Skirt 9,000 8,000
Zipper 7,000 (29,000)
CTI $34,000 ($ 9,000)
The $9,000 consolidated NOL reported in the current year

A) can offset taxable income of Pants and Skirt Corporations from last year.
B) can offset Zipper Corporation separate return taxable income only from last year.
C) can be used only as a carryover to the future.
D) can offset Zipper Corporation separate return taxable income from last year and then be carried
forward to offset the affiliated group's subsequent taxable income.
Answer: D
Objective: 6

A) An affiliated group member's allocated share of an NOL from a consolidated return year may not be
available as a carryback to a separate return year of the common parent corporation.
B) If a corporation ceases to be a member of an affiliated group, the corporation is entitled to carry
forward its share of the consolidated NOL even if the NOL could be used in full on the consolidated
return for the year of cessation.
C) The SRLY (separate return limitation year) rules are designed to prevent the affiliated group from
offsetting its current year taxable income by purchasing corporations having NOL carryovers in order to
use their NOLs.
Answer: C
Objective: 6

A) An affiliated group member incurring an NOL in a separate return year that is available as a carryback
or carryforward to a consolidated return year is subject to a limit on the use of the NOL when the loss
year is designated a separate return limitation year (SRLY).
B) A consolidated NOL may be carried back one year and carried forward twenty years.
C) An NOL incurred in a separate return limitation year by the corporation that is the common parent
corporation for the group in the carryover year is subject to the SRLY limitation.
Answer: A
Page Ref.: C:8-30
Objective: 6
15
56) Key and Glass Corporations were organized last year. They became an affiliated group and filed
separate tax returns. This year, the corporations begin filing a consolidated tax return. Key and Glass
report the following results:
Income (loss) Income (loss)

Consolidated
Key ($10,000) $40,000
Glass 30,000 (15,000)
Which of the following statements is not correct?

A) Key's last year NOL cannot offset Glass's last year profits.
B) Key's last year NOL cannot offset this year's consolidated taxable income.
C) Key's current year income must first be offset by Glass's current year loss.
D) Glass cannot carry its current year loss back against last year's income.
Answer: B
Explanation: B) Key can offset its last year NOL against the current year consolidated taxable income
($25,000).
Page Ref.: C:8-30
Objective: 6
57) Jackson and Tanker Corporations are members of an affiliated group. The two corporations have been
affiliated since they were formed last year. Both corporations have always used a calendar year as their
tax year. Tanker, the subsidiary, has a separate return year NOL of $14,000 from last year. Jackson
Corporation has a separate return year NOL of $16,000 from last year. Commencing this year, the two
corporations filed a consolidated tax return. The NOLs can be carried over
A) to a consolidated return year and both are SRLY (separate return limitation year) losses.
B) to a consolidated return year and Tanker's loss is a SRLY loss.
C) to a consolidated return year without limit.
D) to a consolidated return year and Jackson's loss is a SRLY loss.
Answer: C
Explanation: C) Since the corporations were affiliated since inception, the SRLY loss limitation does not
apply.
Page Ref.: C:8-31
Objective: 6

A) A built-in deduction accrues in a separate return year, but is not recognized in a consolidated return
year.
B) Section 382 adopts a single-entity approach in determining ownership changes.
C) The 50-percentage-point minimum stock ownership change that triggers the Sec. 382 loss limitation
rules will not occur in acquisitive transactions involving a group of corporations filing consolidated
returns.
Answer: B
Page Ref.: C:8-33
Objective: 6
16
59) Blue and Gold Corporations are members of the Blue-Gold affiliated group, which filed a
consolidated tax return for last year, reporting a $200,000 consolidated NOL. Small taxable income
amounts were reported by Blue and Gold in separate tax returns filed in years prior to last year. Early in
the current year, 100% of Blue's stock is purchased by Robert Martin who contributes additional funds to
Blue Corporation sufficient to acquire all of Green Corporation's stock. For the current year, the affiliated
group reports the following results (excluding the consolidated NOL deduction):
Corporation Taxable Income

Blue $150,000
Gold ( 25,000)
Green (since acquisition) 100,000
Which of the following statements is correct?

A) Last year's NOL cannot be carried back.
B) The portion of last year's NOL that is not used as a carryback can be carried over the current year but is
only used against Blue's taxable income.
C) The portion of last year's NOL that is not used as a carryback can be carried over against the current
consolidated taxable income, but is subject to the Sec. 382 limitation.
D) The portion of last year's NOL that is not used as a carryback can be carried over, but is used only
against the Blue's and Gold's taxable income.
Answer: C
Objective: 6
60) Mariano owns all of Alpha Corporation, which owns 100% of Beta Corporation's single class of stock.
On January 1, Alpha and Beta Corporations report a consolidated NOL carryover from prior years. What
is the maximum percentage of Alpha Corporation's single class of stock that Mariano can sell to a single
shareholder without triggering the Sec. 382 loss limitation?
A) 0%
B) 50%
C) 75%
D) 80%
Answer: B
Page Ref.: C:8-33
Objective: 6
17
61) Last year, Trix Corporation acquired 100% of Track Corporation. The acquisition occurred on July 1,
which was five months after Track's creation. The corporations filed separate returns that year and have
filed consolidated returns since then. The group results for the years, excluding the NOL deduction, are
shown below.

Corporation
Trix ($12,000) $34,000
Track ( 10,000) ( 2,000)
Consolidated Taxable Income ($22,000) $32,000
Which of the following statements is incorrect?

A) Last year is an SRLY (separate return limitation year) with respect to Track Corporation.
B) Track's last year loss is offset against the consolidated current taxable income.
C) Track's last year loss can be used to offset the current year's consolidated taxable income.
D) None of Track's last year's loss can be used to offset the current year's consolidated taxable income.
Answer: C
Page Ref.: C:8-33
Objective: 6
62) Which of the following is not reported by an affiliated group on a consolidated basis?
A) capital gain
B) section 1231 gain
C) casualty & theft gain
D) All of the above are included.
Answer: D
Page Ref.: C:8-9
Objective: 3

A) Rules for carryforward and carryback of a consolidated net capital loss and a consolidated NOL are
the same with the exception of the carryforward period.
B) Capital loss carrybacks and carryforwards are all treated as short-term capital losses.
C) A member leaving an affiliated group cannot use capital loss carryovers that originated in one of its
previous separate return years.
Answer: B
Page Ref.: C:8-21
Objective: 6
18
64) Blair and Cannon Corporations are the two members of an affiliated group. No prior net Sec. 1231
losses have been reported by any group member. The two corporations report consolidated ordinary
income of $100,000 and gains and losses from property transactions as follows:
Sec. 1231
Corporation STCG/STCL LTCG/LTCL
Gains and Losses
Blair ($5,000) $6,000 $3,000
Cannon 6,000 (7,000) (3,000)
Included in the above totals is $6,000 of long-term capital losses recognized by Cannon on an
intercompany transaction. Excluded from the above is a $4,000 Sec. 1231 gain originally deferred by
Cannon that must be reported by the group in the current year.
Which one of the following statements is incorrect?

A) The consolidated group must report a net long-term capital gain of $9,000 and a net short-term capital
gain of $1,000.
B) Cannon Corporation's separate return reports a $6,000 net long-term capital gain.
C) The affiliated group reports a $4,000 net Sec. 1231 gain.
D) None of the above statements are incorrect.
Answer: B
Explanation: B) Statement A is correct because the group reports a $1,000 net short-term capital gain
[($5,000) + $6,000]. The group reports a $5,000 [($6,000 - $7,000) + $6,000 deferred loss] net long-term
capital gain before taking into account the Sec. 1231 gains and losses. The group reports a $4,000 [$3,000 -
$3,000 + $4,000 restored gain] net Sec. 1231 gain that is taxed as a long-term capital gain. The total is a
$9,000 net long-term capital gain. Statement B is incorrect because Cannon Corporation reports $6,000 of
short-term capital gains, $1,000 of long-term capital losses, and $1,000 of Sec. 1231 gains, or a net $6,000
short-term (and not long-term) capital gain. Statement C is correct because the affiliated group reports a
$4,000 net Sec. 1231 gain ($3,000 from Blair and $1,000 from Cannon after adding in the restored gain).
Objective: 6
19
65) Roland, Shedrick, and Tyrone Corporations formed an affiliated group a number of years ago, which
has since filed consolidated tax returns. No prior Sec 1231 losses have been reported by any group
member. The group had a consolidated capital loss carryover last year. For the current year, the group
reports the following results:
Ordinary Sec. 1231

Income Gains and Losses
Roland $25,000 $4,000 ($ 2,000) ($5,000)
Shedrick 30,000 (2,000) 14,000 ( 2,000)
Tyrone 20,000 (3,000) 8,000 ( 3,000)
Which of following statements is incorrect?

A) No Sec. 1231 recapture can occur this year.
B) The net capital gain is taxed at the regular corporate tax rates.
C) The Sec. 1231 loss is treated as an ordinary loss.
D) The net capital gain is $20,000.
Answer: D
Explanation: D) The net capital gain is $19,000 ($20,000 - $1,000).
Objective: 5
66) Blair and Cannon Corporations are members of an affiliated group. No prior net Sec. 1231 losses have
been reported by any group member. The two corporations report consolidated ordinary income of
$100,000 and gains and losses from property transactions as follows.
Sec. 1231
Gains and Losses
Blair ($5,000) $6,000 $3,000
Cannon 6,000 (7,000) (3,000)
Which of the following statements is correct?

A) The consolidated group reports a net short-term capital gain of $1,000.
B) Blair Corporation's separate return reports a $4,000 net long-term capital gain.
C) Cannon Corporation's separate return reports a $1,000 net long-term capital loss.
D) All three of the above are correct.
Answer: D
Objective: 5
20
67) Boxcar Corporation and Sidecar Corporation, an affiliated group, reports the following results for the
current year:
Ordinary
Income
Boxcar $10,000 $10,000 ($ 5,000)
Sidecar 30,000 (12,000) 16,000
The affiliated group's consolidated taxable income is

A) $40,000.
B) $49,000.
C) $51,000.
D) $52,000.
Answer: B
Explanation: B) ($40,000 - $2,000 + $11,000)
Objective: 5
68) Boxcar Corporation and Sidecar Corporation, an affiliated group, reports the following results for the
current year:
Ordinary
Income
Boxcar $10,000 $10,000 ($ 5,000)
Sidecar 30,000 (12,000) 16,000
What is the affiliated group's consolidated regular tax liability?

A) $7,700
B) $7,350
C) $6,650
D) $7,950
Answer: B
Explanation: B)
Ordinary income $40,000
Net STCL ( 2,000)
Net LTCG 11,000
Taxable income $49,000
Times: tax rate × 0.15
Tax liability $ 7,350
Objective: 5
21
A) When applying the large corporation rules for purposes of determining underpayments, each member
of an affiliated group is considered separately.
B) The entire consolidated tax liability cannot be collected from one group member.
C) Once consolidated tax returns have been filed for two consecutive years, the affiliated group must pay
estimated taxes on a consolidated basis.
Answer: C
Page Ref.: C:8-26
Objective: 9
70) The Alto-Baxter affiliated group filed a consolidated return for the first time last year. The group does
not come under the "large" corporation rules. For last year, the group reports a tax liability of $60,000.
Cooper Corporation has a $30,000 tax liability last year. This year, the Alto-Baxter affiliated group
purchased all of the Cooper stock. This year, the Alto-Baxter-Cooper group reports an $110,000
consolidated tax liability. To avoid penalties for the current year, the group must make timely estimated
tax payments of how much during the year?
A) $60,000
B) $90,000
C) $110,000
D) No estimated tax payments are required.
Answer: A
Page Ref.: C:8-26
Objective: 9
71) An affiliated group elects the use of the consolidated method for filing its tax return by
A) filing Form 1120.
B) filing a consent to the election from each member of the affiliated group in the initial year.
C) filing an affiliations schedule.
D) All of the above are necessary for the election.
Answer: D
Objective: 9
72) A consolidated return's tax liability is owed by

A) all group members in equal portions.
B) the group member responsible for that portion of the tax liability.
C) all group members who are severely liable.
D) the parent corporation.
Answer: C
Page Ref.: C:8-39
Objective: 9
22
73) Jeffrey Corporation owns 85% of Placer Corporation and 25% of Mercer Corporation. Placer
Corporation owns 60% of Mercer Corporation and 45% of Tyson Corporation. Jeffrey Corporation also
owns 85% of Apple Corporation and Apple Corporation owns 30% of Tyson Corporation. Which of these
corporations are members of an affiliated group if all percentages represent voting power and value held
by the respective corporations?
Answer: Jeffrey Corporation is the parent corporation with Placer, Mercer, and Apple Corporations as
members of the affiliated group. The 75% (30% + 45%) ownership of Tyson Corporation stock does not
meet the 80% ownership minimum.
Page Ref.: C:8-3
Objective: 1
74) Toby Corporation owns 85% of James Corporation's single class of stock and 35% of Mony
Corporation's single class of stock. James Corporation owns 45% of Mony's stock. The remainder of James
and Mony's stock is owned by 80 individual shareholders. Are the corporations part of an affiliated
group, and can they elect to file a consolidated tax return?
Answer: Since Toby owns more than 80% of the stock of James and therefore satisfies the direct
ownership requirement, and Toby and James together own 80% (45% + 35%) of Mony's stock, they are
affiliated corporations. The Toby, James, and Mony group can elect to file a consolidated tax return.
Objective: 1
75) Toby owns all of the single class of stock of James and Mony Corporations. James Corporation owns
all of Volt Corporation's stock. Mony owns all of Wegnin Corporation. Mony and Wegnin Corporations
are foreign corporations. Toby, James, and Volt are domestic corporations. Are the corporations part of an
affiliated group?
Answer: Toby, James, and Volt constitute the affiliated group. Toby is the common parent. Mony and
Wegnin are not included, as they are foreign corporations.
Page Ref.: C:8-2 and C:8-3; Example C:8-3
Objective: 1
76) Penish and Sagen Corporations have filed consolidated tax returns for several calendar years. At the
close of business on September 30, 2012, Penish Corporation sells its all of its Sagen stock to June. What
are the tax consequences to each corporation?
Answer: All of Penish's income is included in the consolidated tax return for 2012. Only nine months of
Sagen Corporation's income is included in the consolidated tax return for 2012. Sagen must also file a
separate tax return for the period October 1 through December 31, 2012.
Page Ref.: C:8-7
Objective: 3
23
77) P-S is an affiliated group that files a consolidated tax return. For the current year, P has separate
taxable income of $350,000 and S's separate taxable loss is $150,000. The group can take a tentative $50,000
consolidated general business credit. If the group's regular tax liability is $61,250 and their tentative
minimum tax liability is $34,500, what is their general business credit limitation? The only difference
between their taxable income and AMTI is the statutory exemption.
Answer:
Regular tax $61,250
Plus: AMT 0
Net income tax $61,250
Minus: the greater of
1. 25% of the group's net regular tax liability
exceeding $25,000 (0.25 × ($61,250 - $25,000) $ 9,062
2. The group's tentative minimum tax 34,500 (34,500)
General business credit limitation $26,750
The unused general business credit may be carried back one year and forward 20 years.
Objective: 5
78) Gee Corporation purchased land from an unrelated corporation several years ago for $105,000. The
land was used by Gee as a storage lot for company trucks. Gee sold the land to Wilkers, its 85%-owned
subsidiary corporation, last year (July 3) for $115,000. The land was also used in Wilkers' trade or
business. Wilkers Corporation sold the land for cash this year (August 22) for $130,000 to a corporation
that was not a member of the affiliated group. What gains and losses are recognized, deferred, or restored
by Gee and Wilkers Corporations?
Answer: Gee Corporation must report the $10,000 Sec. 1231 gain recognized on the sale of the land last
year to Wilkers in its separate taxable income. The gain is deferred by the affiliated group in determining
consolidated taxable income until the year the property is sold outside the group. The recomputed gain is
$25,000. Wilkers recognizes a $15,000 Sec. 1231 gain in the current year when it sells the land for cash to a
nonmember of the group. The group then restores the $10,000 balance of the recomputed gain as a Sec.
1231 gain.
Page Ref.: C:8-12
Objective: 4
24
79) Gee Corporation purchased land from an unrelated corporation several years ago for $105,000. The
land was used by Gee as a storage lot for company trucks. Gee sold the land to Wilkers, its 85%-owned
subsidiary corporation, last year (July 3) for $115,000. The land was also used in Wilkers' trade or
business. Wilkers Corporation sold the land this year (August 22) for $130,000 to a corporation that was
not a member of the affiliated group. The $130,000 purchase price is to be collected in five equal, annual
installments, commencing with the current year's sale date. What gains and losses are recognized,
deferred, or restored by Gee and Wilkers Corporations?
Answer: Gee Corporation must report the $10,000 Sec. 1231 gain recognized on the sale of the land last
year to Wilkers in its separate taxable income. The gain is deferred by the affiliated group in determining
consolidated taxable income until the year the property is sold outside the group. The recomputed gain is
$25,000. Wilkers recognizes a $3,000 gain Sec. 1231 gain ($15,000 × 0.20) in the current year when it sells
the land to a nonmember of the group and collects the first installment. The group then restores the
$10,000 balance of the recomputed gain as a Sec. 1231 gain ratably as the five installments are collected.
$2,000 ($10,000 × 1/5) of gain is restored when each of the five payments is received. A similar amount of
gain is recognized when each subsequent installment is collected.
Page Ref.: C:8-13
Objective: 4
80) Parent Corporation purchases a machine (a five-year property) for $20,000. It claims $4,000 of
depreciation under the MACRS rules in the first year it owns the property. At the close of business on the
last day of the first year, Parent sells the machine to a 100%-owned corporation (Subsidiary) for $18,000.
Subsidiary immediately commences depreciating the machine as a five-year property using the regular
MACRS rules. What depreciation can be claimed by Subsidiary Corporation in the first year it uses the
machine?
Answer: The basis of the machine to Parent on the sale date is $16,000 ($20,000 - $4,000). This basis and
the MACRS depreciation rules carry over to Subsidiary from Parent for this portion of the acquisition
cost. Parent recognizes a $2,000 gain ($18,000 - $16,000), which is deferred when the consolidated tax
return is filed. Subsidiary steps up its basis for the asset by the $2,000 amount, thereby providing a total
basis of $18,000. The basis increase is treated as a new asset by Subsidiary under the MACRS rules.
Subsidiary's depreciation calculation is:
Carryover basis: $20,000 × 0.32 = $6,400
Basis increase: $ 2,000 × 0.20 = 400
Total depreciation $6,800
Objective: 4
25
81) Parent Corporation purchases a machine (a five-year property) for $20,000. It claims $4,000 of
depreciation under the MACRS rules in the first year it owns the property. At the close of business on the
last day of the first year, Parent sells the machine to a 100%-owned corporation (Subsidiary) for $18,000.
Subsidiary immediately commences depreciating the machine as a five-year property using the regular
MACRS rules.
What gain is reported by Parent Corporation in the first year that Subsidiary Corporation depreciates the
machine?
Answer: The restored gain equals the depreciation taken ($400) by Subsidiary Corporation on the step-
up in basis. The gain is ordinary income under Sec. 1245. The basis of the machine to Parent on the sale
date is $16,000 ($20,000 - $4,000). This basis and the MACRS depreciation rules carry over to Subsidiary
from Parent for this portion of the acquisition cost. Parent recognizes a $2,000 gain ($18,000 - $16,000),
which is deferred when the consolidated tax return is filed. Subsidiary steps up its basis for the asset by
the $2,000 amount, thereby providing a total basis of $18,000. The basis increase is treated as a new asset
by Subsidiary under the MACRS rules. Basis increase: $2,000 × .20 = 400
Objective: 4
82) Jason and Jon Corporations are members of an affiliated group whose taxable incomes (before
dividends) are $90,000 and $100,000, respectively. Jason Corporation owns all of the Jon stock. Jon
Corporation received a dividend from a less-than-20%-owned corporation of $9,900 and $25,000 from a
100%-owned nonconsolidated insurance company. Jon Corporation distributed a $40,000 dividend to
Jason Corporation. Jason Corporation also received dividends from a 25%-owned corporation of $9,500.
The consolidated dividends-received deduction for federal income tax purposes is what?
Answer: [(0.70 × $9,900) + (0.80 × $9,500) + (1.00 × $25,000)] = $39,530. The $40,000 dividend is excluded
from Jason Corporation's gross income in preparing the consolidated return.
Page Ref.: C:8-22
Objective: 5
83) Parent and Subsidiary Corporations are members of an affiliated group. Their separate taxable
incomes (before taking into account any dividends) are $75,000 and $85,000, respectively. Subsidiary
Corporation receives a dividend from a less-than-20%-owned corporation of $7,500 and from an affiliated
100%-owned nonconsolidated insurance subsidiary of $40,000. Subsidiary distributes a dividend of
$35,000 to Parent Corporation who also receives dividends of $5,500 from a less-than-20%-owned
corporation. The consolidated dividends-received deduction is what?
Answer:
70% deduction: Consolidated deduction:
0.70 × $5,500 = $3,850 100% dividends-received deduction $40,000
0.70 × $7,500 = 5,250 70% dividends-received deduction 9,100
Total $9,100 Total $49,100
Objective: 5
26
84) A consolidated NOL carryover is $52,000 at the beginning the year. Twenty-five percent of the loss is
allocable to Duke Corporation. Duke Corporation leaves the group in the middle of the affiliated group's
tax year. Before Duke's departure, it had earnings of $15,000 for the year, and the remainder of the
affiliated group earned a total of $25,000, or $40,000 of taxable income for the group, excluding any NOL
carryover. Following its departure from the affiliated group, Duke earned $8,000 in its first separate
return. How much of the $52,000 NOL can Duke use on its first separate return?
Answer:
$ 15,000 Duke contribution to current year CTI
25,000 Plus: other members' contribution to current-year CTI
$ 40,000 Current-year CTI
( 52,000) Minus: NOL available
($ 12,000) NOL carryover available to be used on separate return or consolidated tax return
× 0.25 Allocation to Duke
$ 3,000 Amount allocated to Duke
The entire $3,000 can be used since it is less than Duke's pre-NOL taxable income.
Objective: 6
85) On January 1, Alpha Corporation purchases 100% of the stock of Omega Corporation for $2 million.
During the year, Omega Corporation earns $350,000 of taxable income, $30,000 of tax-exempt income,
and distributes $150,000 in dividends. Each company paid its own tax liability. Assume a 34% tax rate.
What basis adjustment must Alpha Corporation make at year-end?
Answer: Alpha Corporation's initial basis for the Omega Corporation stock is its $2,000,000 purchase
price. The $350,000 of taxable income and $30,000 of tax-exempt interest income earned in the current
year increase the stock basis. The $119,000 ($350,000 × 0.34) federal income tax liability decreases the stock
basis, as does the $150,000 distribution to the parent corporation (Alpha). The year-end basis is $2,102,000
($2,000,000 + $350,000 + $30,000 - $119,000 - $159,000). The year-end basis for the Omega Corporation
stock is $111,000 ($350,000 + $30,000 - $119,000 - $150,000) higher than its $2,000,000 acquisition cost.
Objective: 7
86) Explain the requirements a group of corporations must meet in order to elect to file a consolidated
return.
Answer: The parent corporation must own at least 80% of the total voting power and at least 80% of the
total value of all outstanding stock in at least one includible corporation. Each additional corporation that
is included must also meet the two 80% stock ownership rules either directly or indirectly. Eligible
affiliated groups must make a consolidated return election by filing a timely consolidated tax return.
Objective: 1
27
87) What types of corporations are not includible corporations for purposes of determining whether or
not an affiliated group exists?
Answer: Special tax status corporations are not includible corporations.
• Exempt corporations under Sec. 501
• Insurance companies subject to tax under Sec. 801
• Foreign corporations
• Corporations claiming the Puerto Rico and U.S. possessions tax credit
• Regulated investment companies
• Real estate investment trusts
• Domestic international sales corporations
• S corporations
Page Ref.: C:8-3
Objective: 1
88) What are the differences between a controlled group and an affiliated group?
Answer: Three forms of controlled groups are permitted — brother-sister groups, parent-subsidiary
groups, and combined groups. Only parent-subsidiary groups and the parent-subsidiary portion of a
combined group can elect to file a consolidated tax return. Four primary differences between a controlled
group and an affiliated group exist. First, the two 80% stock ownership tests must be met to have an
affiliated group. Only one of the tests needs to be met to have a controlled group. Second, the controlled
group definition uses certain stock attribution rules and included and excluded corporation rules that are
not used in testing for an affiliated group. Third, certain special status corporations are excluded from the
affiliated group definition that may be included in a controlled group. Fourth, the controlled group
definition is tested only at December 31. The affiliated group definition must be tested on each day of the
year. See Chapter C3 for further discussion of controlled group topics.
Page Ref.: C:8-4
Objective: 1
89) What are the five steps in calculating consolidated taxable income?
Answer: Generally, the five steps are:
1) Compute each group member's taxable income (or loss) based on the member's own accounting
methods as if the corporation were filing its own separate tax return.
2) Make adjustments to each group member's taxable income for certain intercompany transactions,
inventory adjustments, dividends received, excess loss (negative investment basis) accounts, and built-in
deductions.
3) Remove certain gains, losses, and deductions from each member's taxable income since they must be
computed on a consolidated basis (e.g., NOLs, capital gains and losses, Sec. 1231 gains and losses,
charitable contribution deductions, dividends-received deduction, percentage depletion under Sec.
613A).
4) Steps 1 through 3 result in the member's separate taxable income. Combine these amounts to equal
the group's combined taxable income.
5) Adjust the group's combined taxable income for items reported on a consolidated basis to equal the
consolidated taxable income.
Page Ref.: C:8-9; Table C:8-1
Objective: 3
28
90) Why are other intercompany transactions not given any special treatment?
Answer: Since both sides of the transaction are reported in the same consolidated return, they simply net
each other out. If, due to accounting methods, the items would be reported in different tax periods, both
the income and deduction must be reported in the later of the two tax years.
Objective: 4
91) Define intercompany transactions and explain the two types of transactions.
Answer: An intercompany transaction takes place during a consolidated return year between
corporations that are members of the same affiliated group immediately after the transaction. The two
types of intercompany transactions are property and other intercompany transactions. Intercompany
property transaction gains or losses are deferred until a corresponding event occurs. Other intercompany
transactions income or expense is reported in the year in which the corresponding event occurs.
Objective: 4
92) Alpha, Beta, Gamma, and Delta Corporations form a controlled group. Delta is a nonincludible
regulated investment company. Only Alpha, Beta, and Gamma are able to file their income tax returns on
a consolidated basis. What options are available for allocating the 15%, 25%, and 34% tax rates to the
members of the controlled group?
Answer: The benefit that the controlled group receives from the 15%, 25%, and 34% graduated tax rates
are limited. The group only receives one rate reduction for each reduced tax rate bracket. Where no
special apportionment plan is adopted, each bracket is divided equally between the members of the
controlled group. Under our facts, Alpha, Beta, Gamma, and Delta each would be allocated $12,500 of the
15% bracket, $6,250 of the 25% bracket, and $2,481,250 of the 34% bracket. This method will not result in
the lowest overall tax liability if, for example, one or more of the four- member corporations of the
controlled group incurs a loss or has taxable income below $18,750 ($12,500 + $6,250). In this situation, the
tax savings generated by the lower two rate brackets will not be fully used. A solution to this problem is
the adoption of a special plan of apportionment. With this plan, the group has the latitude to allocate the
brackets so as to achieve the maximum tax savings by allocating the reduced tax rates to each member
corporation based on its level of taxable income. This plan must be filed with each corporation's tax
return and is elected each year. Therefore, it can be adjusted to fit each year's facts. Since Delta is a
nonincludible corporation, it will receive an allocable share of the reduced tax rate benefits unless a
special apportionment plan is elected, even though it is not part of the consolidated return.
Page Ref.: C:8-24
Objective: 5
93) What is the carryback and carryforward rule for consolidated NOLs?
Answer: A consolidated NOL may be carried back to the two preceding consolidated return years or
carried over to the twenty succeeding consolidated return years.
Page Ref.: C:8-28
Objective: 6
94) What is the consequence of having losses subject to the SRLY limitations?
Answer: The effect of having a loss tainted as an SRLY loss is that it can be used only to offset taxable
income of the subsidiary member (or possibly loss subgroup) that created the NOL.
Page Ref.: C:8-31
Objective: 6
29
95) How do intercompany transactions affect the calculation of capital gains/losses?
Answer: Deferred intercompany gains/losses are included in the netting of capital gains/losses only
when a corresponding item triggers the recognition of the intercompany item.
Page Ref.: C:8-21
Objective: 5
96) What issues determine whether an affiliated group exists?

Answer: In determining whether an affiliated group exists, three questions must be answered.
• Does a corporation (common parent) directly own 80% or more of at least one includible corporation?
• What are the includible corporations?
• What chains of includible corporations are connected by at least 80% ownership?
Page Ref.: C:8-3
Objective: 1
30
97) All of the stock of Hartz and Ryder Corporations is owned by Morgen. Hartz Corporation has been
reporting $150,000 of taxable income for each of the past five years. Ryder Corporation has been reporting
$30,000 in NOLs for the same period, which totals $150,000. Approximately one-third of Hartz's profits
come from sales to Ryder. Intercompany sales between Hartz and Ryder have increased during each of
the last five years. What tax issues should Morgen consider with respect to his investments in Hartz and
Ryder Corporations?
Answer:
• What advantages would accrue if the Hartz-Ryder affiliated group elected to file a consolidated tax
return?
• Can the profits earned by Hartz Corporation on an intercompany inventory sale to Ryder
Corporation be deferred for tax purposes?
• Can the current-year losses of Ryder Corporation offset the current-year profits of Hartz
Corporation? Are there any restrictions or limitations on deducting the losses?
• Can the preaffiliation losses of Ryder Corporation offset the consolidated taxable income? Are there
any restrictions or limitations on deducting the losses?
• What disadvantages would accrue if the Hartz-Ryder affiliated group elected to file a consolidated
tax return?
• Is additional recordkeeping involved in filing a consolidated return instead of two separate tax
returns?
• What types of corporate groups can file a consolidated tax return?
• What are the stock ownership and includible corporation requirements for an affiliated group?
• Do Hartz and Ryder Corporations as brother-sister corporations satisfy these requirements?
• If an affiliated group does not exist, what changes to the corporate structure must be made to create
an affiliated group?
The current brother-sister relationship for Hartz and Ryder Corporations does not permit the filing of a
consolidated tax return. If a parent-subsidiary relationship were established (e.g., by Morgen's capital
contribution of the Ryder stock to Hartz Corporation), a consolidated tax return could be filed.
Postchange NOLs for Ryder Corporation could offset the profits of Hartz Corporation in the consolidated
tax return. The prechange NOLs are SRLY losses and can be used by the affiliated group only to the
extent that Ryder subsequently earned profits. An adjustment to the transfer price charged for the
product produced by Ryder might permit additional profits to be earned by Ryder and accelerate the use
of the SRLY losses. Profits earned on the intercompany inventory sales are deferred under the
consolidated return rules. Too large of a transfer price change may be indicative of tax avoidance and
cause the IRS to apply Sec. 482 to the intragroup transfers. These deferrals have increased annually over
the last five years. Depending on the inventory method employed (e.g., LIFO or FIFO), the tax deferral
could either be short-term or long-term. Two drawbacks to the filing of a consolidated return are the
additional recordkeeping involved in maintaining the records and preparing the tax returns, and the
smaller deduction and credit limits faced by the group over what Hartz Corporation would have on a
separate return basis.
Objective: 8
31
98) Marietta and Alpharetta Corporation, two accrual method of accounting corporations that use the
calendar year as their tax year, have filed consolidated tax returns for a number of years. Alpharetta
Corporation, a 100% owned subsidiary of Marietta, is transferring a patent, equipment, and working
capital to newly created Georgia Corporation in exchange for 100% of its stock. In 2011, the corporation
will begin to produce parts for the computer industry. Georgia Corporation expects to incur
organizational expenditures of $10,000 and start-up expenditures of $60,000. What tax issues should
Georgia Corporation consider with respect to the selection of its overall accounting method, inventory
method, and tax year, and the proper reporting of its organizational and start-up expenditures?
Answer:
• What tax year can Georgia Corporation elect?
• What overall method of accounting can Georgia Corporation elect?
• What inventory method can Georgia Corporation elect?
• How does Georgia Corporation treat its organizational expenditures? Its start-up expenditures?
Georgia Corporation must use the same tax year as the other two corporations in its affiliated group. In
general, Georgia Corporation can elect to use the cash, accrual, or hybrid methods of accounting.
However, since it is producing parts for the computer industry, inventories will be a material income
producing factor, and it must use the accrual method of accounting for its sales-related activities. It is
possible for Georgia Corporation to use the hybrid accounting method, and if such an election were
made, Georgia would not be required to use the accrual method of accounting for its other income and
expense items. It need not use the same accounting methods as the other two corporations in the affiliated
group. Georgia Corporation can elect any of the inventory methods acceptable under Sec. 471. It does not
need to use the same inventory method as the other two corporations in its affiliated group. Georgia
Corporation can elect to amortize its organizational expenditures and its start-up costs whether or not the
other two corporations have made similar elections. There is no restriction under Code Secs. 195 and 248,
or the consolidated tax return regulations, that similar treatment of such expenditures be followed by all
three corporations.
Objective: 3
32
99) Blitzer Corporation is the parent corporation of a 10-member group that has filed consolidated tax
returns for a number of years. Last year, the group sold all the stock of Wolf Corporation to Jerry Jensen.
This year, Wolf Corporation reported a $300,000 NOL. Wolf's taxable income while a group member
averaged $200,000 annually for the past five years but is expected to be only $50,000 next year due to
start-up costs that will be incurred with the introduction of a new product line. Profits are expected to
increase in each succeeding year. What issues should Blitzer have considered when trying to value Wolf's
NOL prior to its sale? What tax issues should Wolf now consider when deciding how to use its NOL?
Answer:
• What alternatives exist for using the NOL?
• Can the separate-return NOL of Wolf be carried back to a consolidated tax year of the Blitzer
affiliated group?
• If so, what special limitations (if any) is the NOL subject to?
• What is the projected tax refund if the NOL is carried back to a prior consolidated return year?
• Who files for the tax refund? Who receives the refund from the IRS?
• Was any provision made for Wolf receiving the NOL refund payment from the Blitzer affiliated
group in the stock purchase agreement should a separate NOL be carried back?
• What is the projected taxable income of Wolf Corporation in the future?
• What is the projected tax refund if the NOL is carried forward to a separate return year(s)?
• What special limitations (if any) is the NOL subject to (e.g., Sec. 382 restrictions following a change in
ownership)?
• How is the election to forgo the NOL carryback made?
• What effect does the low taxable income in the future years and the Sec. 382 limitation have on the
valuation of the NOL? The company?
A larger tax refund should be available to Wolf Corporation by carrying the NOL back to the prior tax
years of Blitzer Corporation. The marginal tax rate for the earlier tax years appears to be 39% while Wolf
has a 15% rate for the near future. The separate-return NOL is an SRLY loss when carried back, and its
use is subject to the SRLY limitations. The entire loss carryback should be absorbed within the two-year
carryback period since Wolf reported separate-return profits of $200,000 annually when part of the
affiliated group, Wolf files for the refund based on the carryback. A carryover of the NOL is likely subject
to the Sec. 382 loss limitations. We do not know enough about Wolf's new owners to be able to reach a
definite conclusion about the Sec. 382 issue. The tax refund from an NOL carryback will be paid to
Blitzer. As such, Blitzer may be reluctant to pay the refund to Wolf unless such an event was agreed upon
at the time of the sale. From Wolf's perspective, the sales agreement should include a provision requiring
Blitzer to pay the refund to Wolf Corporation.
Objective: 6
33
Another random document with
no related content on Scribd:
MEMOIRS
OF THE
LIFE OF DAVID RITTENHOUSE;
ANTERIOR TO
HIS SETTLEMENT IN PHILADELPHIA.
The paternal ancestors of David Rittenhouse were early and long

seated at Arnheim, a fortified city on the Rhine, and capital of the
district of Velewe or Veluive, sometimes called the Velau, in the
Batavian province of Guelderland;[55] where, it is said, they
conducted manufactories of paper,[56] during the course of some
generations. The orthography of the name was formerly
Rittinghuysen, as the writer of these memoirs was informed by an
European member of this family.[57] But it is net improbable, that, in
more strict conformity to the idiom of its Saxo-Germanic original, the
name was spelt Ritterhuysen[58]—or, perhaps, Ritterhausen; which
signifies, in our language, Knights’ Houses: a conjecture that seems
to be somewhat corroborated by the chivalrous emblems alluding to
this name, belonging to the family, and which have been already
noticed.
It has been asserted, that the first of the Rittenhouses who

migrated to America, was named William; and that he went from
Guelderland to the (now) state of New-York, while it was yet a Dutch
colony. This William was also said to have left at Arnheim a brother,
Nicholas, who continued to carry on the paper-making business in
that city.[59] But, in a genealogical account of the family in the
possession of the Memorialist, Garrett (or Gerard) and Nicholas
Rittenhouse are stated to have arrived at New-York, from Holland, so
late as the year 1690: it likewise states, that Nicholas there married
Wilhelmina Dewees, a sister of William Dewees, who came thither
about the same time; and that, soon afterwards, they all removed to
the neighbourhood of Germantown in Pennsylvania; where Nicholas
established the first paper-mill ever erected in America.[60] It is
believed, however, that Garrett and Nicholas Rittenhouse were sons
of William; who is supposed to have arrived in some part of the
original territories of New-York, prior to the year 1674;[61] that the
Nicholas left in Arnheim, was his brother; and that his sons Garrett
and Nicholas, who are stated to have been the first of the family that
settled in New-York, in 1690 (from whence they removed, “soon
afterwards,” into Pennsylvania,) did, in fact, transfer themselves into
this latter province, in that year.—Garrett left children; some of
whose descendants are resident in Pennsylvania, and others in
New-Jersey.
Nicholas Rittenhouse, the grandfather of our Philosopher, died

about the year 1730; leaving three sons, William, Henry, and
Matthias; and four daughters, Psyche, Mary, Catharine, and
Susanna. Of these daughters, Psyche intermarried with John
Gorgas, from whom are descended the Gorgas’s of Cresham and
Cocolico; Mary, with John Johnson, the father of Casper, John,
Nicholas, William, and Benjamin Johnson, some of whom are now
(or were lately) living, in the neighbourhood of Germantown;
Catharine, with Jacob Engle, in the same vicinity; and Susanna, with
Henry Heiley of Goshehoppen.
William Rittenhouse, the eldest brother of our Philosopher’s father,

died at the paper-mills, near Germantown. He left several children,
one of whom did lately, and perhaps yet does, carry on those works.
—Henry and Matthias removed to the townships of Worcester and
Norriton, about the year 1732 or 1733; where both lived to be
upwards of seventy years of age.
The old American stock of the Rittenhouses were Anabaptists,[62]

and persons of very considerable note in that religious society.
Probably, therefore, they were induced to establish their residence in
Pennsylvania, towards the close of the seventeenth century, by the
tolerating principles held forth by William Penn,[63] in respect to
religious[64] concerns; the justness of the tenure by which he became
proprietor of the soil;[65] and the excellence of the political regulations
established by that great legislator, for the civil government of his
newly-acquired domains.
Matthias, the youngest son of Nicholas Rittenhouse, by

Wilhelmina Dewees his wife, was born at the paper-mills belonging
to his family, near Germantown,[66] in the county of Philadelphia and
about eight miles from the capital of Pennsylvania, in the year 1703.
Having abandoned the occupation of a paper-maker, when about
twenty-nine years of age, and two years after his father’s death, he
then commenced the business of a farmer, on a piece of land he had
purchased in the township of Norriton,[67] about twenty miles from the
city of Philadelphia; his brother Henry establishing himself in the
same manner, in the adjoining township of Worcester. In October,
1727,—about three years prior to Matthias’s removal from the vicinity
of Germantown,—he had become a married man. His wife was
Elizabeth William (or Williams) who was born in 1704, and was
daughter of Evan William, a native of Wales. Her father, a farmer,
dying while she was a child, she was placed under the charge of an
elderly English (or, more probably, Welsh) gentleman, in the
neighbourhood, of the name of Richard Jones; a relation of her
family. That truly respectable woman possessed a cheerful temper,
with a mind uncommonly vigorous and comprehensive: but her
education was much neglected, as is too often the fate of orphan
children. Yet, perhaps, no censure ought justly to be imputable to Mr.
Jones, in this case; because there were very few schools of any
kind, in country situations, at that early day.[68]
The extraordinary natural understanding of this person, so very

nearly related as she was to the subject of these memoirs, seemed
to the writer to merit particular notice; and the more especially, for a
reason which shall be hereafter mentioned.
By this wife, Matthias Rittenhouse had four sons and six
daughters;[69] three of whom died in their minority. The three eldest of
the children were born at the place of their father’s nativity; the
others, at Norriton. Of the former number was David, the eldest son,
the subject of these memoirs.—He was born on the 8th day of April,
1732.[70]
This son was an infant, when his family removed to Norriton and
engaged in the business of farming; and his father appears, early, to
have designed him for this most useful and very respectable
employment. Accordingly, as soon as the boy arrived at a sufficient
age to assist in conducting the affairs of the farm, he was occupied
as an husbandman. This kind of occupation seems to have
commenced at a very early period of his life; for it is ascertained,
that, about the fourteenth year of his age, he was actually employed
in ploughing his father’s fields.[71]
At that period of our future Philosopher’s life, early as it was, his

uncultivated mind, naturally teeming with the most prolific germs of
yet unexpanded science, began to unfold those buds of genius,
which soon after attained that wonderful luxuriance of growth by
which the usefulness and splendour of his talents became eminently
conspicuous. His brother Benjamin relates,[72] that, while David was
thus employed at the plough, from the age of fourteen years and for
some time after, he (this informant,) then a young boy, was
frequently sent to call him to his meals; at which times he repeatedly
observed, that not only the fences at the head of many of the
furrows, but even his plough and its handles, were covered over with
chalked numerical figures, &c.[73]—Hence it is evident, that the
exuberance of a sublime native genius and of almost unbounded
intellectual powers, unaided by any artificial means of excitement,
were enabled, by dint of their own energy, to burst through those
restraints which the corporeal employments of his youth necessarily
imposed upon them.
During that portion of his life in which this youthful philosopher

pursued the ordinary occupations of a husbandman, which continued
until about the eighteenth year of his age, as well as in his earlier
youth, he appeared to have inherited from healthful parents a sound
constitution, and to have enjoyed good health.
It was at this period, or rather about the seventeenth year of his

age, that he made a wooden clock, of very ingenious workmanship:
and soon after, he constructed one of the same materials that
compose the common four-and-twenty hour clock, and upon the
same principles. But he had exhibited much earlier proofs of his
mechanical genius, by making, when only seven or eight years old, a
complete water-mill in miniature.
Mr. Rittenhouse’s father was a very respectable man: he

possessed a good understanding, united to a most benevolent heart
and great simplicity of manners. The writer long knew him; and, from
his early acquaintance with the character, the appearance, and the
habits of this worthy sire of an illustrious son, he had long supposed
him to have been inclined to the religious principles of the society
called Friends, although he had been bred a Baptist:—but a
circumstance which shall be noticed hereafter, will evince the
liberality of this good man’s opinions, in the all-important concern of
religion. Yet, with truly estimable qualities, both of the head and
heart, old Mr. Rittenhouse had no claims to what is termed genius;
and therefore did not, probably, duly appreciate the early specimens
of that talent, which appeared so conspicuous in his son David.
Hence, he was for some time opposed to the young man’s earnest
desire to renounce agricultural employments; for the purpose of
devoting himself, altogether, to philosophical pursuits, in connexion
with some such mechanical profession as might best comport with
useful objects of natural philosophy, and be most likely, at the same
time, to afford him the means of a comfortable subsistence. At
length, however, the father yielded his own inclinations, in order to
gratify what was manifestly the irresistible impulse of his son’s
genius: he supplied him with money to purchase, in Philadelphia,
such tools as were more immediately necessary for commencing the
clock-making business, which the son then adopted as his
profession.
About the same time, young Mr. Rittenhouse erected on the side
of a public road, and on his father’s land in the township of Norriton,
a small but commodious work-shop; and, after having made many
implements of the trade with his own hands, to supply the deficiency
of many such as were wanting in his purchased stock, he set out in
good earnest as a clock and mathematical instrument maker.
From the age of eighteen or nineteen to twenty-five, Mr.

Rittenhouse applied himself unremittingly, both to his trade and his
studies. Employed throughout the day in his attention to the former,
he devoted much of his nights to the latter. Indeed he deprived
himself of the necessary hours of rest; for it was his almost invariable
practice to sit up, at his books, until midnight, sometimes much later.
It was in this interval and by these means, that our young

philosopher impaired his constitution, and contracted a pain in his
breast; or rather, as he himself described that malady to the writer, “a
constant heat in the pit of the stomach, affecting a space not
exceeding the size of half a guinea, attended at times with much
pain;” a sensation from which he was never exempt, during the
remainder of his life. About this time, he retired from all business,
and passed several weeks at the Yellow Springs, distant but a few
miles from his place of residence. He there bathed and drank the
waters; and from the use of this chalybeate, he appeared to have
derived some benefit to his general health, though it afforded little
alleviation of the pain in his breast.
A due regard to the sacredness of historic truth demands, that

some circumstances which occurred while Mr. Rittenhouse was yet a
youth, and one which it is believed had a very considerable influence
on his subsequent pursuits and reputation, should now be made
known. Because the writer of these memoirs conceives he ought not
to be restrained, by motives which would appear to him to arise from
a mistaken delicacy, from introducing into his work such notices of
his own father, long since deceased, as do justice to his memory;
while they also serve to elucidate the biographical history of Mr.
Rittenhouse.
In the year 1751, when David Rittenhouse was about nineteen
years of age, Thomas Barton, who was two years elder than David,
opened a school in the neighbourhood of Mr. Matthias Rittenhouse.
It was while Mr. Barton continued in that place, supposed to have
been about a year and a half, that he became acquainted with the
Rittenhouse Family; an acquaintance which soon ripened into a
warm friendship for young Mr. Rittenhouse, and a more tender
attachment to his sister, Esther.
Two years afterwards (in 1753), the personal attractions and fine
understanding of the sister rendered her the wife of Mr. Barton; who,
for some time before, had officiated as one of the tutors in the then
recently-established Academy, afterwards College, of Philadelphia;
now the University of Pennsylvania. In this station, he continued until
the autumn of 1754; when he embarked for England, for the purpose
of receiving episcopal ordination in the church, and returned to
Pennsylvania in the early part of the following year.
The very intimate connexion thus formed between Mr. Barton and
a sister of Mr. Rittenhouse (who was two years elder than this
brother), strengthened the bands of friendship which had so early
united these young men: a friendship affectionate and sincere, and
one which never ceased until Mr. Barton’s death, nearly thirty years
afterwards; notwithstanding some difference of political opinions had
arisen between these brothers-in-law, in the latter part of that period,
in consequence of the declaration of the American independence.
Mr. Barton was a native of Ireland, descended from an English

family; of which, either two or three brothers settled in that kingdom,
during the disastrous times in the interregnum of Charles I. Having
obtained very considerable grants of land in Ireland, this family
possessed ample estates in their then adopted country. Hence,
flattering prospects of an establishment there, in respect to fortune,
were held out to their descendants. Through one of those untoward
circumstances, however, by means of which the most unexpected
revolutions in the affairs of families and individuals have been
sometimes produced, the expectations of an independent patrimony
which our Mr. Barton’s father had entertained, were speedily
dissipated. Nevertheless, this gentleman, who was the eldest son of
his family, was instructed in the rudiments of a classical education in
the vicinity of his family residence in the county of Monaghan, under
the direction of the Rev. Mr. Folds, a respectable English clergyman;
and at a suitable age, he was sent to the university of Dublin, where
he finished his academical education. Entirely destitute of fortune,
but possessing a strong intellect, stored with useful and ornamental
learning as well as an ardent and enterprizing spirit, this young
adventurer arrived in Philadelphia soon after he had completed his
scholastic studies.
The writer’s principal design, in presenting to the public view these

slight sketches of the early history of the late Rev. Mr. Barton, shall
be now explained.
When Mr. Rittenhouse’s father established his residence at

Norriton, and during the minority of the son, there were no schools in
the vicinity at which any thing more was taught, than reading and
writing in the English language and the simplest rules of arithmetic.
Young Mr. Rittenhouse’s school-education, in his early youth, was
therefore necessarily bounded by these scanty limits of accessible
instruction: He was, in truth, taught nothing beyond these very
circumscribed bounds of literary knowledge, prior to the nineteenth
year of his age; though it is certain, that some years before that
period of his life, he began to be known—at least in his own
neighbourhood—as a mathematician and astronomer, in
consequence of his cultivation of the transcendent genius with which
heaven had endued him.
Under such circumstances as these, the familiar intercourse

between David Rittenhouse and his young friend Barton, which
commenced when the age of the former did not exceed nineteen
years, could not fail to prove highly advantageous to the mental
improvement of both. The one possessed a sublime native genius;
which, however, was yet but very imperfectly cultivated, for want of
the indispensable means of extending the bounds of natural
knowledge: the other had enjoyed the use of those means, in an
eminent degree, and thus justly acquired the reputation of a man of
learning. A reciprocation of these different advantages, as may be
well supposed, greatly promoted the intellectual improvement of
both.
It will be readily conceived, that Mr. Barton’s knowledge of books

must have rendered even his conversation instructive to Mr.
Rittenhouse, at so early a period of his life. But the former so greatly
admired the natural powers of his young friend’s mind, that he took a
delight in obtaining for him access to such philosophical works, and
other useful books, as he was then enabled to procure for his use;
besides directing, as far as he was capable, the course of his
studies.
After Mr. Barton’s removal to Philadelphia and while he resided in

that city, his means of furnishing his friend with books, suitable for
his instruction, were greatly enlarged; an advantage of which he
most assiduously availed himself: and it is supposed to have been
about this time, that a small circulating library was established in
Norriton, at the instance of Mr. Barton, zealously seconded by the
co-operation and influence of Mr. Rittenhouse.
Finally, when Mr. Barton returned from England, in the year 1755
—at which time Mr. Rittenhouse was yet but twenty-three years of
age, he brought with him a valuable addition to his friend’s little
library; consisting, in part, of books which he himself had
commissioned Mr. Barton to purchase for him.[74]
No doubt can be entertained, that Mr. Rittenhouse derived the

great and extraordinary faculties of his mind from nature; and it is
equally evident, that for some years after he arrived to manhood, he
possessed very slender means of improving his natural talents: Nay
further, it is well known to those who were long personally
acquainted with him, that after his removal to Philadelphia, when he
was eight-and-thirty years of age, a period of life at which the place
of his residence, and the condition of his pecuniary affairs, united in
placing within his reach much that is dear to science,—even then,
his long continued professional employment and the various public
stations he filled, in addition to frequent ill health, deprived him of a
large share of those advantages. The vast stock of knowledge
which, under such untoward circumstances, he actually acquired, is
therefore an additional proof of his native strength of intellect.
But, wonderful as a kind of intuitive knowledge he possessed

really was, his mental powers would probably have remained hidden
from the world, they would have been very imperfectly cultivated, at
best, had not an incident apparently trivial, and which occurred when
our Astronomer was a young boy, furnished what was, in all
probability, the very first incitement to an active employment of his
philosophical as well as mechanical genius.
Mr. Rittenhouse’s mother having been already noticed somewhat

particularly, the reason for this being done shall be here stated: it is
connected with the incident just now referred to. This valuable
woman had two brothers, David and Lewis Williams (or William),
both of whom died in their minority. David, the elder of these,
pursued the trade of a carpenter, or joiner. Though, like his nephew
and namesake, he was almost wholly an uneducated youth, he also,
like him, early discovered an unusual genius and strength of mind.
After the death of this young man, on opening a chest containing the
implements of his trade which was deposited at Mr. M.
Rittenhouse’s, (in whose family it is presumed he dwelt,) a few
elementary books, treating of arithmetic and geometry, were found in
it: With these, there were also various calculations and other papers,
in manuscript; all, the productions of David Williams himself, and
such as indicated not only an uncommon genius, but an active spirit
of philosophical research. To this humble yet valuable coffer of his
deceased uncle, Mr. Rittenhouse had free access, while yet a very
young boy. He often spoke of this acquisition as a treasure;
inasmuch as the instruments of his uncle’s calling afforded him some
means of exercising the bent of his genius towards mechanism,
while the books and manuscripts early led his mind to those
congenial pursuits in mathematical and astronomical science, which
Were ever after the favourite objects of his studies.[75]
It being thus apparent, that not only Mr. Rittenhouse’s mother but
her brother David Williams were persons of uncommon intellectual
powers, the writer thinks it fairly presumable, that our Astronomer
inherited his genius from his mother’s family.[76] His surviving brother
has decidedly expressed this opinion: in a letter on the subject of the
deceased, addressed to the writer of these memoirs soon after Dr.
Rittenhouse’s death, he says—“I am convinced his genius was more
derived from his mother, than from his father.”
A casualty that occurred in the year 1756, appeared to have been

very near depriving the world of the talents, services, and example of
our Philosopher, at a very early period of those pursuits in which he
was afterwards so eagerly engaged. This circumstance is thus
narrated by himself, in a letter dated the 26th of July, in that year,
and addressed to the Rev. Mr. Barton, at his then residence in
Redding township, York county.[77]
“I was,” said our young philosopher, “obliged to ride hard to reach

Lancaster, the evening after I left you; and being somewhat tired
myself, as well as my horse, I determined to go to the Dunker’s-
Town,[78] where I staid the remainder of that day and the night
following. I was there entertained with an epitome of all the whimsies
mankind are capable of conceiving. Yet it seemed to me the most
melancholy place in the world, and I believe would soon kill me were
I to continue there; though the people were exceedingly civil and
kind, and the situation of the place is pleasant enough.[79] From
thence I went homewards, through Reading;[80] where I was
agreeably surprised, the number and goodness of the buildings far
exceeding my expectations.
“You have perhaps seen, in one of the last papers, an account of

the prodigiously large hail-stones which fell in Plymouth.[81] The
lightning struck a tall green poplar standing in our meadow, just
before the door, and levelled it with the earth. I was standing
between the tree and house; and, at the same instant that I saw the
flash of lightning, felt a most violent shock through my whole body,—
and was stunned with such a horrible noise, that it is impossible for
imagination to represent any thing like it.”
The advantages and the disadvantages, which Mr. Rittenhouse

respectively enjoyed and encountered, until after he had attained to
the period of manhood, have been mentioned; and it will be readily
perceived, that the latter greatly outweighed the former, in every
other particular than that of his native genius, which alone was
sufficient to preponderate against innumerable difficulties.
The great deficiencies in his education, as well as their causes,

having been misconceived and incorrectly represented in some
publications, a due regard to truth demands a correction of such
mistaken opinions. Soon after his death, there appeared in the
Maryland Journal, “Anecdotical Notices of Mr. David Rittenhouse;”
which, although written with some ingenuity and knowledge of the
subject, contained several errors. It is therein asserted, among other
things, that “his parents, incapable of giving him any other education
than common reading and writing, intended to have brought him up
to country-business; but, being blessed by nature with a mechanical
turn of mind, he soon gave specimens of his ingenuity in making
wooden clocks: This so recommended him to notice, as to give him
an opportunity of learning the clock-making business.”—It has been
already shewn, that Mr. Rittenhouse never received the least
instruction in any mechanic art; and it is not ascertained that he ever
made more than one wooden clock. It is also notoriously an error,
that his parents were “incapable” of giving him any other education,
than the common schooling he received: they were by no means
poor, though not wealthy. His father inherited some patrimony; and
he had, besides, been about nine years concerned in conducting the
paper-manufactory near Germantown, after his one-and-twentieth
year, before he purchased the Norriton farm.[82] This part of his
estate he was enabled to give to his eldest son, David, about the
year 1764; prior to which time the old gentleman removed to a farm
he had purchased, nearly adjoining it in Worcester township, and on
which he had erected a good two-story stone dwelling-house with
suitable out-houses. There Mr. David Rittenhouse’s father and
mother afterwards resided, together with their other son, Benjamin,
(the house being so constructed as, conveniently, to accommodate
two small families,) until the death of old Mrs. Rittenhouse in the
autumn of 1777, at the age of seventy-three years, and of her
husband in the autumn of 1780, in the seventy-eighth year of his
age. The Worcester farm was left to the younger son: and, in
addition to these not inconsiderable establishments for his sons, the
old gentleman had given small portions to each of his five daughters,
when they severally married. The remains of this worthy and upright
man, for he truly merited that character, were interred in the
cemetery belonging to a Baptist congregation, in the neighbourhood,
in which both he and his wife had long attended divine worship. But,
some years before his death, the old gentleman disposed of a lot of
ground very near to his own house,—and gratuitously, if the writer’s
information be correct,—to a Presbyterian congregation, for a burial
place, and site for a church they were then about to erect. If this little
piece of land was a donation to the religious society to whom it
belongs, the grant of it, though not of great value, furnishes an
instance of that liberality of sentiment and goodness of heart which
characterized our Astronomer’s father, and to which some allusion is
before made.
When, therefore, all the circumstances here mentioned, respecting

Matthias Rittenhouse’s property and condition of life, shall be taken
into view, it will be evident that he possessed a decent competency;
with an estate quite independent, though not large: for he never
enjoyed what is now termed affluence.
Concerning our Astronomer’s early life and condition, even his

eloquent eulogist, Dr. Rush, was mistaken in some particulars. His
assertion, that Mr. Rittenhouse was descended from parents
“distinguished for probity, industry, and simple manners,” is perfectly
correct. But, although he was comparatively “humble” in his “origin,”
his father held the highly respectable station of an intelligent,
independent farmer;[83] and it has been also seen, that his paternal
ancestors, for some generations in succession, were proprietors of
considerable manufactories of an article important in commerce and
the arts, and eminently useful in literature and science as well as in
the common affairs of life.
Dr. Rush has remarked, in regard to Mr. Rittenhouse’s talents first

becoming generally known, that “the discovery of his uncommon
merit belonged chiefly to his brother-in-law, the Rev. Mr. Barton, Dr.
Smith, and the late Mr. John Lukens.” Perhaps it might be said, with
greater strictness, that the “discovery” here spoken of, belonged
solely to Mr. Barton; by whom it was communicated, very early, to his
learned and reverend friend, Dr. Smith,—and through him, to the
ingenious astronomical observer, Mr. Lukens, (afterwards surveyer-
general,) as well as some other distinguished characters of that time.
The writer in the Maryland paper before referred to, after having
noticed the prevailing opinion that Mr. Rittenhouse was self-taught,
had corrected the full extent of that misconception, in these words:
“This is not strictly true; for, while engaged in these acquirements,”
(astronomy, &c.) “the Rev. Mr. Barton, a learned episcopal clergyman
of Lancaster, married his sister.”——“Mr. Barton, admiring the
simplicity of manners and natural genius of his brother-in-law,
afforded him every assistance in his power,—not only in
mathematics, but in several other branches of literature: Mr.
Rittenhouse was worthy of his notice; for he lost no time, and spared
no pains, to improve himself in knowledge, as far as his limited
education would permit.”
Hence, as well as from the preceding narrative, it will appear that

Dr. Rush was led into a further mistake, respecting Mr. Rittenhouse.
—In regard to his exalted genius, the learned professor has amply
done justice to his memory. He has, in particular, recorded one
extraordinary fact, in proof of his genius, well worthy of notice; and
which is therefore related in the Professor’s own words.——“It was
during the residence of our ingenious philosopher with his father, in
the country, that he made himself master of Sir Isaac Newton’s
Principia, which he read in the English translation of Mr. Motte. It was
here, likewise, he became acquainted with the science of Fluxions;
of which sublime invention he believed himself, for a while, to be the
author: nor did he know for some years afterwards, that a contest
had been carried on between Sir Isaac Newton and Leibnitz, for the
honour of that great and useful discovery.” Then exclaims the
ingenious eulogist, in terms of well-founded admiration, “What a
mind was here!”—But, immediately after, he adds—“Without literary
friends or society, and with but two or three books, he became,
before he had reached his four-and-twentieth year, the rival of two of
the greatest mathematicians in Europe!”—The circumstance must,
then, have escaped Dr. Rush’s recollection—if indeed he had ever
been made acquainted with it,—that five years before Mr.
Rittenhouse attained to the age of twenty-four, he found at least one
literary friend, in Mr. Barton; whose intimate society he long enjoyed,
prior to that period; and that, through his means, he had access to
many books.[84]
It is not meant to be insinuated, however, that Mr. Barton ever

gave Mr. Rittenhouse any insight into the knowledge of fluxions; or,
indeed, much instruction, if any at all, in other of the higher branches
of mathematics: because the first named gentleman never did
himself pretend to the character of a profound mathematician; and
because, likewise, although always esteemed a man of learning, his
pursuits in science and literature were chiefly directed to objects of a
different nature. That Mr. Rittenhouse derived some instruction and
information from his early acquaintance with Mr. Barton, is certain:
but, whatever may have been the extent of the literary advantages
which the latter was enabled to confer on his young friend and
companion, they could not in any degree derogate from the intrinsic
excellence and greatness of our Astronomer’s innate genius.
That a mind so formed as that of our young philosopher—situated

in life as he was—should have impelled him to assume the business
of clock-making, can not be a matter of surprize: this occupation,
connected with that of a mathematical instrument maker, is such as
may be well supposed to have presented itself to his youthful
ingenuity; being in accordance with the philosophical bent of his
genius in his early years, while yet untutored in science and
unknown to the world.
The great utility of the common clock, in measuring time, is
universally known. It possesses numerous and manifest advantages,
beyond those of sun-dials, clepsydræ, sand-glasses, and other
horological instruments, by reason of its vastly superior accuracy:
the sun-dial, indeed, is oftentimes wholly useless in all situations,
even in the day-time; and always necessarily so, at night.
But the many improvements which have been made in modern

times, in chronometers,—more especially in pendulum-clocks,—
have very much advanced a correspondent accuracy in astronomical
observations: and these improvements, together with those lately
made in telescopes—chiefly by Dr. Herschel, the discoverer of the
Georgium Sidus[85]—afford good grounds for hoping, that yet farther
and more important additions will continue to be made to the recent
discoveries in astronomy.
Further improvements may also be expected to take place, in the

construction of watches and other spring-chronometers; so as to
render them still more useful for the purposes of navigation, by
ascertaining with greater precision the longitude at sea.[86] For this
purpose, the finely-improved English time-keepers of Harrison,
Mudge, and others, have been found of the greatest utility. Mr. de
Zach, (in his Explanation and uses of the Tables of the Motions of
the Sun,[87]) after some observations on determining differences of
longitude by means of astronomical observation, says,[88]—“De
cæteris longitudinem determinandi modis, non est hic disserendi
locus;—de uno vero, horologiâ maritimâ seu nauticâ, quidquam
adjicere non alienum erit. Triginta jam abhinc annis, ingeniosissimi
horologiorum artifices, Harrison, Cummings, Kendal, Arnold, Mudge,
apud Anglos,—Le Roy et Berthoud apud Gallos, varia navigantium
usui, egregia excogitaverant, et ad magnum perduxerant perfectionis
gradum, horologia nautica, (Anglis, Time-keeper.) Cum eorum in
longitudinibus itenere maritimo definiendis, usum quisque norit, plura
hic dicere abstineo; simile horologium ab ingenioso horolopega
Thom. Mudge constructum, in Observatorio Regio Grenovicensi
sæpius exploratum, anno 1784, a Clar. D. Campbell, classis navalis
præfecto[89] ad Terram Novam (Newfoundland) vectum, et reductum,
ab hoc tempore in Observatorio Excellentissimi Comitis de Bruhl,
Londini, Doverstreet, assidue observatum est. Hoc ipsum
horologium maritimum, anno 1786, in terrestribus, iteneris
longitudines determinandi gratia, concreditum mihi fuit, cum â
Serenissimo Duce Saxe-Gothanâ, omnium scientiarum bonarumque
artium patrono, imprimis astronomiæ, faventissimo, Londino
evocatus in Germaniam me conferrem, ubi amplissimæ
splendidissimæ Speculæ, Astronomicæ Gothanæ extruendæ cura
mihi demandata erat;[90] attuli eodem hoc tempore, ad Serenissimi
mandatum, minoris molis horologium, quod in braccis gestari solet
(Anglis, Pocket-chronometer,) a Londiniensi artifice, D. Josiah
Emery,[91] constructum, quod summâ accuratione et subtilitate
elaboratum, nil majoribus cedit horologiis nauticis, ut videre licet ex
tribus horum motuum elenchis ab Ilustr. Comite de Bruhl, et â
aliorum Dr. Arnold, nuperrime publici juris factis. Sub finem anni
1786 et ad initium 1787, Serenissimum in itenere per Germaniam,
Galliam, et Italiam, comitatus sum: hoc itenere quorundam locorum
et Specularum astronomicarum longitudines definitæ sunt ex
comparatione temporis horologii maritimi (quod ad tempus solare
medium Londinense, in Doverstreet incedebat) cum tempore medio
loci, quod sextante Hadleianâ per solis altitudines, quas
correspondentes dicimus, vel ex comparatione cum illo, quod in
Speculis Astronomicis ab ipsis astronomis traditum nobis fuit. Iisdem
itaque automatis, cum primum Gotham advenissem, observatorii
futuri longitudinem maximâ cum curâ atque diligentiâ definivi, quam
paucis post diebus Serenissimus Dux Londinum profectus,
chronometro suo secum deportato denuo perbelle comprobaverat.”
This very respectable testimony of an eminent German

astronomer affords incontestable proof of the great accuracy, of
which nautical chronometers are susceptible, and to which they have
actually been brought by some artists of celebrity, mostly English.[92]
The general use of the common clock ought not to derogate from
the ingenuity of an invention of such universal importance in the
affairs of human life. The pendulum-clock now in use was brought to
some degree of perfection, if not invented, by Huygens,[93] who was
one of the first mathematicians and astronomers of the age in which
he lived: and the date of this invention is about the middle of the
seventeenth century; although Galileo disputed with him the
discovery, a few years earlier. Clocks of some kind date their
antiquity much higher; some writers pretending to carry their
invention back as far as the year 510 of the Christian era. However,
on the authority of Conrad Gesner,[94] the honour of inventing the
clock, before the application of the pendulum to these machines was
made by Huygens, belongs to England: He says, that “Richard
Wallingford, an English abbot of St. Albans, who flourished in the
year 1326, made a wonderful clock by a most excellent art; the like
of which could not be produced in all Europe.”[95] This was forty-six
years before Henry de Vic, a German, made his clock for Charles V.
king of France; and fifty-six years before the duke of Burgundy
ordered one, which sounded the hour, to be carried away from the
city of Courtray, in Flanders.
Within our own day and a short period of time preceding it, great
improvements have been made in the construction of the pendulum-
clock,[96] as well as in other descriptions of Chronometers.[97] Mr.
Rittenhouse’s early zeal in his practical researches into astronomy,
prompted him to desire the greatest possible accuracy in the
construction of time-pieces adapted to astronomical purposes; and
uniting, as he did, operative skill with a thorough knowledge of the
principles upon which their construction depends, he was enabled—
impelled by so powerful a motive—to display to the world, by his own
manual ingenuity, the near approach to perfection to which the
pendulum-chronometer may be brought. Besides his astronomical
pursuits, his early employment in ascertaining the limits and fixing
the territorial boundaries of Pennsylvania, and of some of the
neighbouring states, obliged him to supply himself with
chronometers of the greatest possible accuracy: and these were
either made by his own hands, or under his immediate inspection by
his brother, who, with the aid of his instruction, became an excellent
mechanician. One of these fine instruments, bearing on its face the
name of Benjamin Rittenhouse as the maker, and the date of the
year 1786, is now in the possession of Mr. Norton Prior,[98] of
Philadelphia: but that admirable one, the workmanship of which was
executed by our Philosopher himself, and which was part of the
apparatus of his Philadelphia Observatory, is now placed in the hall
of the American Philosophical Society.[99] This is constructed on a
greatly improved plan of his own, which improvement was afterwards
applied to that now belonging to Mr. Prior; and the latter is the same
chronometer, it is believed, that was used by Mr. D. Rittenhouse, in
fixing the northern line which divides Pennsylvania from New York,
and in establishing the boundary line between the last mentioned
state, and Pennsylvania and Massachusetts, respectively, in the
years 1786 and 1787.—A description of the principles of his
observatory-chronometer here mentioned, together with some
account of its mechanism, will be found in the Appendix: the former
having been communicated to the writer of these memoirs by the
ingenious Robert Patterson, Esq. director of the Mint; and the latter
by that able mechanician, Mr. Henry Voight, chief coiner in that
institution,—a person who, by reason of his well-known skill as a
clock and watch-maker, was employed by Mr. Rittenhouse more than
forty years since, in the fabrication of some of his philosophical
instruments.
The great accuracy and exquisite workmanship displayed in every

thing belonging to the profession he pursued, that came through his
hands, soon became pretty extensively known: and this knowledge
of his mechanical abilities, assisted by the reputation he had already
acquired as a mathematician and astronomer, in a short time
procured him the friendship, respect and patronage, of some
eminent scientific characters; while it promoted his interest, in the
profession he had thus newly chosen. In this he was, nevertheless,
self-taught; for he never received the least instruction from any
person, in any mechanic art whatever: and, therefore, if he were to
be considered as being merely an excellent artist, in an occupation
intimately connected with the science of mathematics—untutored, as
he was, in any art or science,—he would deservedly be deemed an
extraordinary and eminent man. It will be perceived, however, that it
was the union of the almost unbounded powers of his genius, and
his prodigious acquirements in a sublime science, with his wonderful
abilities as a philosophical mechanic—and these faculties and
attainments, moreover, combined with an amiable and virtuous
character,—which constituted that celebrity so justly attached to his
name.
Our young philosopher lived a retired, though by no means an

inactive life, in his father’s family, for several years after he arrived to
(what is usually termed) lawful age. In this situation, which was a
pleasant one in many respects, he long continued to enjoy the
tranquil scenes of rural life, amidst the society of an amiable and
very intelligent family-circle, and surrounded by many worthy and
estimable neighbours, by whom he was both loved and respected.
His chief occupation was the profession he had chosen; but in such
occasional intervals of personal abstraction from the mechanical part
of his business, as the assistance the workmen he employed
enabled him to obtain, he devoted much of the time to philosophical
pursuits and study. Frugal in his expenditures, his industry furnished
him amply with the means of comfort; and in the plentiful and decent
mansion of his father’s family he experienced, with contentment,
almost every gratification that a reasonable mind could desire. Good
health seemed alone to be wanting to complete his happiness, in his
earlier years; a privation which he felt through the greater part of his
life.
Such was the condition of Mr. Rittenhouse, while he remained

under the same roof with his father and mother, and some of their
unmarried children. It was a mode of life which his disposition was
calculated to enjoy; for, strongly attached to his kindred and friends
by the benevolence of his nature, he derived much of his happiness
from the reciprocal affections of a domestic circle and the kind
intercourses of friendly esteem.
There does not appear to have been, for a long time, any
occurrence that could have much disturbed the placid composure of
our philosopher’s mind,—until 1762; in which year his sister Anne
died, in the twenty-sixth year of her age. She was the wife of Mr.
George Shoemaker, a respectable citizen of Philadelphia, and a

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3) Brother-sister controlled groups can elect to file a consolidated tax return.

5) The election to file a consolidated return is made annually.

13) Identify which of the following statements is true.

19) Identify which of the following statements is true.

20) Identify which of the following statements is true.

21) Identify which of the following statements is true.

D) none of the above

27) Identify which of the following statements is true.

29) Which of the following statements is true?

31) Identify which of the following statements is false.

D) none of the above

34) Which of the following events is an intercompany transaction?

37) Identify which of the following statements is false.

38) Identify which of the following statements is true.

43) Identify which of the following statements is true.

45) Identify which of the following statements is true.

46) Identify which of the following statements is true.

How much of Subsidiary's loss can be carried back to last year?

Taxable Income Taxable Income

The $15,000 consolidated NOL reported in the current year

Taxable Income Taxable Income

The $9,000 consolidated NOL reported in the current year

54) Identify which of the following statements is true.

55) Identify which of the following statements is true.

Income (loss) Income (loss)

Which of the following statements is not correct?

58) Identify which of the following statements is true.

Corporation Taxable Income

Which of the following statements is correct?

Taxable Income Taxable Income

Which of the following statements is incorrect?

63) Identify which of the following statements is true.

Which one of the following statements is incorrect?

Ordinary Sec. 1231

Which of following statements is incorrect?

Which of the following statements is correct?

The affiliated group's consolidated taxable income is

What is the affiliated group's consolidated regular tax liability?

72) A consolidated return's tax liability is owed by

96) What issues determine whether an affiliated group exists?

The paternal ancestors of David Rittenhouse were early and long

It has been asserted, that the first of the Rittenhouses who

Nicholas Rittenhouse, the grandfather of our Philosopher, died

William Rittenhouse, the eldest brother of our Philosopher’s father,

The old American stock of the Rittenhouses were Anabaptists,[62]

Matthias, the youngest son of Nicholas Rittenhouse, by

The extraordinary natural understanding of this person, so very

At that period of our future Philosopher’s life, early as it was, his

During that portion of his life in which this youthful philosopher

It was at this period, or rather about the seventeenth year of his

Mr. Rittenhouse’s father was a very respectable man: he

From the age of eighteen or nineteen to twenty-five, Mr.

It was in this interval and by these means, that our young