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Chapter 08: Consolidated Tax Returns
1. A consolidated Federal income tax return may be the product of a merger of the affiliates, or another corporate
combination.
a. True
b. False
ANSWER: True
RATIONALE: The creation of an affiliated group might be the result of a tax-deferred restructuring of the
capital of the affiliates.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: CPET.SWFT.LO: 8-01 - LO: 8-01
NATIONAL STANDARDS: United States - BUSPORG: Comprehension - BUSPORG:Comprehension
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
2. Business reasons, and not tax incentives, constitute the primary motivation for most corporations to form a
conglomerate and file tax and financial accounting reports on a consolidated basis.
a. True
b. False
ANSWER: True
RATIONALE: Nontax incentives predominate over tax motivations.
POINTS: 1
DIFFICULTY: Easy
CPET.SWFT.LO: 8-03 - LO: 8-03
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
OTHER: Time: 2 min.
3. The consolidated return rules are designed to allow a tax-neutral means by which to elect to file on a consolidated basis.
a. True
b. False
ANSWER: True
RATIONALE: The rules are designed to achieve organizational neutrality.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
Copyright Cengage Learning. Powered by Cognero. Page 1

4. Most of the Federal consolidated income tax return rules are found in detailed sections of the tax Regulations.
a. True
b. False
ANSWER: True
RATIONALE: Legislative Regulations are the source of most of the consolidated return rules. These
regulations seldom are challenged successfully in the courts.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
5. The rules for computing Federal consolidated taxable income are some of the most complex in the tax law.
a. True
b. False
ANSWER: True
RATIONALE: The tax rules in this area can be difficult to understand.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
6. For consolidated tax return purposes, purchased goodwill is amortized as a deduction to taxable income over 15 years.
Under financial accounting rules, 40-year amortization is allowed.
a. True
b. False
ANSWER: False
RATIONALE: For book purposes, changes in the value of the purchased goodwill can become revenue and
expense items, but no amortization is allowed over a fixed period of years.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
7. A limited partnership can join the parent’s consolidated group for book and for tax purposes.
a. True
b. False
ANSWER: False
RATIONALE: Only U.S. C corporations can join a Federal consolidated return.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES:CPET.SWFT.LO: 8-02 - LO: 8-03
OTHER: Time: 2 min.
8. After a takeover, the parent’s balance sheet shows a fair market value cost basis in the subsidiary, for both book and tax
purposes.
a. True
b. False
ANSWER: False
RATIONALE: The tax rule as to the basis of the subsidiary stock depends on the form of the takeover:
carryover basis is used where the tax-deferred reorganization rules are met (see Chapter 7),
but a FMV basis is taken when the subsidiary is acquired by purchase in a taxable event.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
9. When the parent acquires 51% of a subsidiary U.S. corporation, the subsidiary can join the consolidated financial
statements and the consolidated tax return of the parent.
a. True
b. False
ANSWER: False
RATIONALE: For tax purposes, the ownership requirement usually is met at 80% or more of the
subsidiary’s stock.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
10. A consolidated Federal income tax group must meet the eligibility requirements of the Regulations on the first day of
the first year for which the election to consolidate is effective, and then on the last day of every succeeding tax year.
a. True
b. False
ANSWER: False
RATIONALE: The compliance and eligibility rules of the consolidated tax return must continue to be met on
every day for which the consolidation election is in effect.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
11. The right to file on a consolidated basis is available to a group of corporations when they constitute a “parent-
subsidiary affiliated group.”
a. True
b. False
ANSWER: True
RATIONALE: Consolidated return status is available to affiliated, not controlled, groups.
POINTS: 1
DIFFICULTY: Easy
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 2 min.
12. A Federal consolidated group can claim a dividends received deduction for payments that the parent receives from
other affiliates.
a. True
b. False
ANSWER: False
RATIONALE: A consolidated group eliminates an intercompany dividend. As a result, no dividends
received deduction is available for these payments.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
13. Giant Ltd. owns 100% of the stock of Middle Corporation. BottomCorp is owned 60% by Giant and 40% by Middle.
Giant’s Federal consolidated income tax return includes both Middle and Bottom.
a. True
b. False
ANSWER: True
RATIONALE: The required ownership is 80% for tax purposes, counting multiple tiers of ownership among
the group members.
POINTS: 1
DIFFICULTY: Moderate
OTHER: Time: 2 min.
14. A subsidiary corporation must leave the consolidated group if it is restructured as an LLC.
a. True
b. False
ANSWER: True
RATIONALE: Non-corporate entities are not eligible to join a Federal consolidated group. The rules to
qualify to elect as a consolidated group must continue to be met.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
15. A corporation organized in Germany and wholly owned by the U.S. parent can be included in a Federal consolidated
return.
a. True
b. False
ANSWER: False
RATIONALE: Only affiliates that are organized in the U.S. or in a U.S. possession can join a consolidated
group.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
16. A tax-exempt charitable trust, created by a U.S. C corporation, can join in a Federal consolidated return.
a. True
b. False
ANSWER: False
RATIONALE: Tax-exempt organizations are ineligible to join Federal consolidated returns.

POINTS: 1
OTHER: Time: 2 min.
17. A joint venture, taxed like a partnership, can join in a consolidated Federal income tax return.
a. True
b. False
ANSWER: False
RATIONALE: All group members must be U.S. corporations.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
18. A calendar year parent corporation wants to file its tax returns on a consolidated basis with its affiliates. The group’s
election to file consolidated Federal corporate income tax returns must be made by the extended due date of the first
return on which the consolidation is applied (i.e., September 15).
a. True
b. False
ANSWER: True
RATIONALE: The reference date for the election is the tax year of the group’s parent corporation.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
19. Campbell Corporation left the Crane consolidated tax return group after the calendar 2016 tax year. Generally, Crane
can add Campbell back to the consolidated group, but no earlier than for the 2022 tax year.
a. True
b. False
ANSWER: True
RATIONALE: In most cases, an affiliate can rejoin the same consolidated group only after five tax years
pass.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
20. The calendar year Sterling Group files its Federal corporate income tax return on a consolidated basis. The group’s
Form 1120 is due on April 15, or September 15 if an extended due date is approved by the IRS.
a. True
b. False
ANSWER: True
RATIONALE: A five-month filing extension can be approved automatically by the IRS.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
21. All affiliates joining in a newly formed consolidated return must consent to the election on Form 1122, as attached to
the Form 1120 for the group.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
22. Consolidated group members each are jointly and severally liable for the entire consolidated income tax liability.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.

23. With the filing of its first consolidated return, the parent corporation of a Federal consolidated group makes an
irrevocable election as to how the group will allocate a tax year’s income tax liability among the group members.
a. True
b. False
ANSWER: False
RATIONALE: Group members all must agree on the tax-sharing method that is used. That election can be
changed, usually receiving automatic IRS permission, for every tax year.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
24. A Federal consolidated tax return group can apply the “relative taxable income” method as a means to apportion the
tax liabilities of the members among the affiliates.
a. True
b. False
ANSWER: True
RATIONALE: The regulations allow other tax-sharing methods as well.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
25. Each of the members of a Federal consolidated tax return group can claim its own $40,000 AMT exemption, subject to
phase-out.
a. True
b. False
ANSWER: False
RATIONALE: Affiliated group members share one AMT exemption, as do the members of all parent-
subsidiary controlled groups.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
26. Consolidated group members each must use the same tax year end, and all of the members must use the same tax
accounting methods (e.g., LIFO or FIFO).
a. True
b. False
ANSWER: False
RATIONALE: Members must conform to the parent’s tax year, but tax accounting methods can differ
among the members.
POINTS: 1
OTHER: Time: 2 min.
27. When the net accumulated taxable losses of a subsidiary exceed the parent’s acquisition price, the parent’s basis in the
subsidiary’s stock becomes negative.
a. True
b. False
ANSWER: False
RATIONALE: An excess loss account is created. Stock basis in a subsidiary cannot be less than zero.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
28. If subsidiary stock is redeemed or sold outside the group when an excess loss account exists, the selling parent
corporation recognizes ordinary income equal to the account balance.
a. True
b. False
ANSWER: False
RATIONALE: The parent usually recognizes a capital gain equal to the excess loss account. Any remaining
gain often constitutes ordinary income.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
29. In computing consolidated E & P, dividends paid to the parent by group members are subtracted.
a. True
b. False
ANSWER: False
RATIONALE: There is no such concept as consolidated E & P in the Federal income tax law. Each entity
accounts for its own E & P on a separate basis, including its share of gain/loss from
intercompany transactions, and decreasing E & P by its apportioned share of consolidated
tax liabilities. Dividends paid within the group are eliminated when the consolidated tax return
is prepared.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
30. In computing consolidated E & P, a negative adjustment is allowed for the group’s disallowed travel and
entertainment expenditures.
a. True
b. False
ANSWER: False
RATIONALE: There is no such concept as consolidated E & P in the Federal income tax law. Each entity
accounts for its own E & P on a separate basis, reducing E & P for its allocated share of the
year’s Federal income tax liability.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
31. In computing consolidated taxable income, the domestic production activities deduction (DPAD) is removed from the
taxable incomes of the group members and determined on a group basis.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.

32. In computing consolidated taxable income, compensation amounts are removed from the taxable incomes of the group
members and determined on a group basis.
a. True
b. False
ANSWER: False
RATIONALE: Compensation is not a group item.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
33. In computing consolidated taxable income, capital gains and losses are removed from the taxable incomes of the
group members and determined on a group basis.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
34. The starting point in computing consolidated taxable income is the sum of the separate Federal taxable income
amounts of the affiliated group members.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.

35. An example of an intercompany transaction is the use of the trademarks of the parent corporation by a subsidiary for
an arm’s length licensing fee.
a. True
b. False
ANSWER: True
RATIONALE: The payor’s deduction is deferred under § 267 until the recipient recognizes gross income.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
36. When a subsidiary sells to the parent some business-use property that has appreciated from its $20,000 basis to a
$50,000 fair market value, the subsidiary immediately recognizes $30,000 ordinary income on the consolidated return.
a. True
b. False
ANSWER: False
RATIONALE: The gain is deferred until the property leaves the group by sale or other exchange. The
amount of the gain for purposes of the eliminating entry is $30,000.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
37. Lacking elections to the contrary, Federal consolidated NOLs are carried back two years and then forward twenty
years.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
38. When a consolidated NOL is generated, each affiliate is allocated a share of the loss.

a. True
b. False
ANSWER: True
RATIONALE: Apportionment of the group’s NOL is made among the members, on a proportionate basis.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
39. Keep Corporation joined an affiliated group by merger in 2018. The group generated a consolidated 2018 NOL, and
Keep’s share of the loss was $50,000. Lacking an election by the parent to the contrary, Keep can carry the loss back to its
separate 2016 return, and the parent can claim a tax refund.
a. True
b. False
ANSWER: False
RATIONALE: Unless the parent elects to forgo the loss carryback, any refund is paid to Keep separately.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
40. Keep Corporation joined an affiliated group by merger in 2010. The group generated a 2018 consolidated NOL, and
Keep’s share of the loss was $50,000. Keep’s share of the loss is included in the group’s NOL carryforward to 2019.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
41. When a member departs from a consolidated group, it leaves behind any NOLs that it generated while in the group.
The parent corporation and remaining affiliates apply those NOLs against future consolidated taxable income.
a. True
b. False
ANSWER: False
RATIONALE: The affiliate takes its apportioned loss with it.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
42. Cooper Corporation joined the Duck consolidated Federal income tax return group, when Cooper held a $1 million
NOL carryforward. In its first year as a part of the Duck group, Cooper generated a $150,000 operating profit. For that
year, Duck can deduct only $150,000 of Cooper’s NOL in computing consolidated taxable income.
a. True
b. False
ANSWER: True
RATIONALE: The deduction for a SRLY loss is limited to the lesser of the loss corporation’s current or
cumulative positive contribution to the group’s consolidated taxable income. Here, that
amount is the current year’s $150,000 profit.
POINTS: 1
DIFFICULTY: Easy
KEYWORDS: Bloom's: Application
OTHER: Time: 2 min.
43. Cooper Corporation joined the Duck consolidated Federal income tax return group, when Cooper held a $1 million
NOL carryforward. In its first year as a part of the Duck group, Cooper generated a $150,000 taxable loss. For that year,
Duck cannot deduct any of Cooper’s NOL in computing consolidated taxable income.
a. True
b. False
ANSWER: True
RATIONALE: The deduction for a SRLY loss is limited to the lesser of the loss corporation’s current or
cumulative positive contribution to the group’s consolidated taxable income. Here, that
amount equals the current-year Cooper profit.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
44. A Federal consolidated filing group aggregates its separate charitable contributions for the tax year, deductions for
which then are subject to an annual limitation of 10% of consolidated taxable income.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
45. The foreign tax credit of a consolidated group can be greater than the sum of the credits of the group members when
filing separately.
a. True
b. False
ANSWER: True
RATIONALE: Optimizing deductions and credits is a potential advantage of consolidation.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
46. A penalty can be assessed by the IRS if the parent corporation does not keep good records to support the computation
of a subsidiary’s stock basis.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
47. Which of the following potentially is a disadvantage of electing to file a Federal consolidated corporate income tax
return?
a. The consolidated ACE adjustment could be reduced for the filing group.

b. Recognition of losses from certain intercompany transactions is deferred.
c. The tax basis of investments in the stock of subsidiaries is unaffected by members contributing to consolidated
taxable income.
d. The § 1231 loss of one member is not offset against the § 1231 gain of another member of the group.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
48. Which of the following is not generally a disadvantage of filing Federal corporate income tax returns on a
consolidated basis?
a. Net capital losses from one affiliate can offset the capital gains from another. This can reduce the tax liabilities
of the group as a whole.
b. Realized losses from transactions between affiliates are not recognized immediately.
c. Compliance costs usually are higher when a consolidation election is in effect.
d. The election generally is binding for future tax years.
ANSWER: a
RATIONALE: This is an advantage of consolidation.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
49. Which of the following potentially is a disadvantage of electing to file a Federal corporate income tax consolidated
return?
a. Increased deduction amounts when computations are made on a group basis.
b. Deferral of gains realized in transactions between group members.
c. Increased basis in the stock of a subsidiary that generates annual taxable income.
d. Additional administrative costs in complying with the election.
ANSWER: d
RATIONALE: All of the items may be computed on a group basis and be used to manage the tax liabilities
of the group as a whole.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
50. Which of the following is not a requirement that must be met before a group files a consolidated return?
a. None of the corporations can be ineligible under the Code to file on a consolidated basis with the others.
b. All of the corporations must be members of an affiliated group.
c. The group members must share the same inventory accounting method.
d. The group members must share a common tax year end.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
51. Under the consolidated return rules, the realized gain from an intercompany transaction is deferred. For most
taxpayers, this produces:
a. An advantage in terms of the time value of money.
b. A disadvantage in terms of the time value of money.
c. A compliance issue that cannot be resolved.
d. A 20% penalty on the consolidated group.
ANSWER: a
RATIONALE: A tax deferral reduces the present value of the tax liability.
POINTS: 1
DIFFICULTY: Medium
LEARNING OBJECTIVES: LO: 8-03
KEYWORDS: Bloom’s: Analysis
OTHER: Time: 5 min.
52. Which of the following tax effects becomes more restrictive if an election is made to file a group’s Federal corporate
income tax returns on a consolidated basis?
a. Choice of members’ tax accounting methods
b. Use of the lower tax rate brackets.
c. Use of the $40,000 AMT exemption.
d. Members who are liable for the consolidated tax liability.
ANSWER: d
RATIONALE: The others are treated alike even if no election to consolidate is made, because the
controlled group rules also apply. Consolidated group members are jointly and severally
liable for the consolidated tax liability.
POINTS: 1
DIFFICULTY: Easy

OTHER: Time: 5 min.
53. Which of the following entities is eligible to file Federal income tax returns on a consolidated basis?
a. A U.S. C corporation that files on a separate basis for its state income tax returns.
b. The charitable foundation of a U.S. C corporation.
c. The liquidating trust of a U.S. C corporation.
d. A wholly owned French subsidiary of a U.S. C corporation.
ANSWER: a
POINTS: 1
DIFFICULTY: Medium
OTHER: Time: 5 min.
54. Which of the following entities is eligible to join in a Federal consolidated return?
a. A sole proprietor with annual sales of more than $50 million.
b. A U.S. corporation’s § 401(k) plan.
c. A partnership organized in Germany.
d. A corporation that operates in seven different U.S. states.
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
55. Which of the following entities is eligible to file Federal income tax returns on a consolidated basis?
a. Professional sports team operating as a limited partnership.
b. Japanese corporation engaged in multinational operations, including two-thirds of its activities in the U.S.
c. Japanese corporation engaged in multinational operations, including one-third of its activities in the U.S.
d. U.S. corporation engaged in the nuclear energy industry.
ANSWER: d
POINTS: 1
DIFFICULTY: Medium
OTHER: Time: 5 min.
56. The Rack, Spill, and Ton Corporations file Federal income tax returns on a consolidated basis. The group’s tax return
currently is under audit. Under a valid tax-sharing agreement, each corporation is liable for one-third of the group’s
consolidated tax liability. The affiliates have agreed with the auditor that the group’s unpaid liability for the year is
$90,000. Because of an incorrect tax return position, another $3,000 in interest and an $18,000 penalty is attributable
solely to Ton.
At present, only Rack is solvent and has the cash with which to make such a tax payment. What is the maximum amount
for which the government could be successful in forcing Rack to satisfy the outstanding liabilities of the consolidated
group?
a. $0
b. $90,000
c. $93,000
d. $108,000
e. $111,000
ANSWER: e
RATIONALE: Each member has joint and several liability for the entire amount of the group’s income taxes,
interest, and penalties outstanding.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
57. How must the IRS collect the liability for Federal taxes from among a consolidated group?
a. Against the parent of the group.
b. According to the members’ current internal tax-sharing agreement.
c. Against the member of the group that generated the tax.
d. No particular order of collection is prescribed by IRS rules.
ANSWER: d
RATIONALE: The IRS is not bound to follow a group’s internal tax-sharing agreement.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.

58. How do the members of a Federal consolidated group split among themselves the benefits of the lower tax brackets on
the first $75,000 of taxable income?
a. According to their relative net asset holdings.
b. According to an internal tax-sharing agreement.
c. According to an internal tax-sharing agreement, which may be modified by the IRS upon audit.
d. According to a tax-sharing agreement that must be approved by the IRS by the end of the first quarter of the
tax year.
ANSWER: b
RATIONALE: This agreement is respected by the government if all group members agree to it in writing.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
59. Conformity among the members of a consolidated group must be implemented for which of the following tax items?
a. Use of foreign tax payments (i.e., as a credit or deduction).
b. Tax accounting method (i.e., cash or accrual).
c. Inventory accounting method (e.g., FIFO or dollar-cost averaging).
d. Tax year-end.
ANSWER: d
RATIONALE: The group members all must use the parent’s tax year-end.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
60. How are the members of a Federal consolidated group affected by computations related to E & P?
a. Each member keeps its own E & P account.
b. E & P is computed solely on a consolidated basis.
c. Members’ E & P balances are frozen as long as the consolidation election is in place.
d. Consolidated E & P is computed as the sum of the E & P balances of each of the group members, computed on
the last day of the tax year.
ANSWER: a
RATIONALE: There is no such concept as consolidated E & P in the Federal income tax law.
POINTS: 1
DIFFICULTY: Easy

OTHER: Time: 5 min.
61. Azure Corporation joins the Colorful Corporation Federal consolidated return group. As a result:
a. Azure continues to file its own Form 1120.
b. The existing Colorful consolidation election is terminated.
c. Azure’s tax results immediately are added to the Colorful group’s consolidated Form 1120.
d. Azure’s tax results first are added to the Colorful group’s consolidated Form 1120 for the next tax year.
ANSWER: c
RATIONALE: The results of the consolidation election for Azure are immediate.
POINTS: 1
DIFFICULTY: Medium
KEYWORDS: Bloom’s: Comprehension
NOTES: Time: 5 min.
62. Azure Corporation leaves the Colorful Corporation Federal consolidated return group on the last day of year 1. As a
result:
a. Azure’s tax results are included in the group’s consolidated Form 1120 for the final time for year 2.
b. The existing Colorful consolidation election is terminated.
c. Azure’s leaving the group is effective only when IRS permission to do so is granted.
d. Azure files its own Form 1120 beginning with year 2.
ANSWER: d
RATIONALE: The results of leaving the consolidated group are immediate.
POINTS: 1
DIFFICULTY: Medium
KEYWORDS: Bloom’s: Application
OTHER: Time: 5 min.
63. Calendar year ParentCo acquired all of the stock of SubCo on January 1, Year 1, for $1,000,000. The parties
immediately elected to file consolidated income tax returns. SubCo generated taxable income of $250,000 for Year 1 and
paid a dividend of $100,000 to ParentCo. In Year 2, SubCo generated an operating loss of $350,000, and in Year 3 it
produced taxable income of $750,000. As of the last day of Year 3, what was ParentCo’s basis in the stock of SubCo?
a. $1,650,000
b. $1,550,000
c. $1,000,000
d. $0
ANSWER: b
RATIONALE: ParentCo’s initial stock basis was $1,000,000. Positive adjustments to basis include the
$250,000 income for Year 1 and the $750,000 of income for Year 3. Negative adjustments to
basis include the $100,000 dividend paid to ParentCo in Year 1 and the $350,000 loss in Year
2.
Purchase price for SubCo, initial basis $1,000,000
Year 1 Income 250,000
Year 1 Dividend (100,000)
Year 2 Loss (350,000)
ParentCo’s Basis in SubCo stock, Year 3 $1,550,000
POINTS: 2
DIFFICULTY: Challenging
OTHER: Time: 10 min.
64. Calendar year ParentCo purchased all of the stock of SubCo on January 1, Year 1, for $500,000. SubCo produced a
loss for Year 1 of $150,000 and distributed cash of $25,000 to ParentCo. In Year 2, SubCo generated a loss of $450,000;
in Year 3, it recognized net income of $90,000. What is ParentCo’s capital gain or (loss) if it sells all of its SubCo stock to
a nongroup member on Year 4, for $150,000?
a. $185,000
b. $150,000
c. ($35,000)
d. ($535,000)
e. All gain/loss is ordinary when subsidiary stock is sold.
ANSWER: a
RATIONALE: When accumulated deficits in the subsidiary’s post-acquisition earnings and profits exceed
the acquisition price, an excess loss account is created to permit the group to recognize
current subsidiary losses, while avoiding a negative stock basis. If the subsidiary stock is sold
to a nongroup member, the balance of the excess loss account is recognized as capital gain
income by the seller.
Sales Proceeds $150,000
Purchase price of SubCo $500,000
Year 1 Loss (150,000)
Year 1 Dividend (25,000)
Year 2 Loss (450,000)
Stock basis in subsidiary –0–
Balance of Excess Loss Account 35,000
Capital Gain $185,000
POINTS: 2

65. In computing a group’s consolidated taxable income, a subsidiary’s net capital gain is:
a. Removed from group taxable income.
b. Used to compute the group’s net capital gain/loss.
c. Both a. and b. occur.
d. Neither a. nor b. occurs.
ANSWER: c
RATIONALE: A group item is combined with the similar item as generated by the other affiliates.
POINTS: 1
DIFFICULTY: Medium
OTHER: Time: 5 min
66. In computing a group’s consolidated taxable income, the first step is to:
a. Compute the taxable income amounts for each affiliate on a standalone basis.
b. Obtain IRS permission to continue to file on a consolidated basis.
c. Eliminate the results of all intercompany transactions for the tax year.
d. Compute the allowable group NOL carryforward.
ANSWER: a
RATIONALE: Exhibit 8.2.
POINTS: 1
OTHER: Time: 5 min.
67. ParentCo owned 100% of SubCo for the entire year, and both companies use the accrual method of tax accounting.
During the year, SubCo purchased $20,000 of supplies from ParentCo. In addition, SubCo provided internal audit services
to ParentCo, which were worth $40,000. Including these transactions, ParentCo’s separate taxable income was $75,000,
and SubCo’s separate taxable income was $100,000. What is the group’s consolidated taxable income for the year?
a. $215,000
b. $195,000
c. $175,000
d. $155,000
ANSWER: c
RATIONALE: As a general rule, intercompany transactions are not eliminated by group members, but the
transactions do tend to cancel each other out. In this instance, ParentCo has $20,000 of
income from the sale of supplies to SubCo, and SubCo has a $20,000 deduction. SubCo has
$40,000 of income for the services rendered to ParentCo, and ParentCo has a $40,000
deduction. Thus, consolidated taxable income in this instance is $175,000, the sum of the
ParentCo and SubCo separate taxable incomes.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
68. ParentCo owned 100% of SubCo for the entire year. ParentCo uses the accrual method of tax accounting, whereas
SubCo uses the cash method. During the year, SubCo sold raw materials to ParentCo for $35,000 under a contract that
requires no payment to SubCo until the following year.
Exclusive of this transaction, ParentCo had income for the year of $30,000, and SubCo had income of $50,000. The
group’s consolidated taxable income for the year was:
a. $165,000.
b. $150,000.
c. $115,000.
d. $80,000.
ANSWER: d
RATIONALE: Since SubCo uses the cash method of accounting, it will not recognize the $35,000 of income
for the materials sold to ParentCo until the next tax period (when payment is received).
ParentCo’s related deduction must also be deferred until the later year. The group’s
consolidated taxable income is $80,000, the sum of ParentCo’s and SubCo’s separate
incomes.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
69. ParentCo and SubCo have filed consolidated returns since both entities were incorporated in Year 1. Taxable income
computations for the members include the following. Neither group member incurred any capital gain or loss transactions
during these years, nor did they make any charitable contributions.
ParentCo’s SubCo’s Taxable Consolidated
Year Taxable Income Income Taxable Income
Year 1 $100,000 $ 35,000 $135,000
Year 2 $100,000 ($ 20,000) $ 80,000
Year 3 $100,000 ($109,000) ?
Year 4 $100,000 $190,000 ?
The Year 3 consolidated loss:
a. must be carried forward, unless an election to forgo carryforward is made by the parent.
b. must be carried back, unless an election to forgo the carryback is made by the parent.
c. can be used only to offset SubCo’s future income.
d. cannot be used to offset any of ParentCo’s Year 1 income.
ANSWER: b
RATIONALE: A net operating loss arising in a consolidated return year must first be carried back two years
(starting with the earliest year), and thereafter, if not completely absorbed, may be carried
forward. However, the parent can elect to forgo any carryback, and thus carry the loss
forward. The use of the Year 3 loss is not limited to SubCo income amounts, since the
companies have filed consolidated returns for all years of their existence.
POINTS: 2
DIFFICULTY: Easy
OTHER: Time: 5 min.
70. ParentCo purchased 100% of SubCo’s stock on January 1, Year 2, and the companies have filed consolidated returns
since then. Taxable income computations for the members include the following. Neither group member incurred any
capital gain or loss transactions during these years, nor did they make any charitable contributions.
ParentCo’s SubCo’s Taxable Consolidated

Year 1 $100,000 $ 70,000 N/A
Year 2 $100,000 ($ 70,000) $30,000
Year 3 $ 12,000 ($ 20,000) ?
Year 4 $100,000 $200,000 ?
The Year 3 net operating loss:
a. may be carried back to offset SubCo’s Year 1 taxable income.
b. may be carried forward only and applied against group income if so elected by ParentCo.
c. cannot be carried back against Year 1 SubCo income, as consolidated returns were not filed.
d. either a or b, but not both.
ANSWER: d
RATIONALE: The $8,000 (not $20,000) Year 3 net operating loss may be carried back against SubCo’s
Year 1 taxable income, as SubCo is solely responsible for generating the loss. Alternatively,
ParentCo could elect to forgo the carryback of the Year 3 consolidated loss, thus preserving
the loss deduction for the group’s subsequent years.
POINTS: 2
DIFFICULTY: Easy
OTHER: Time: 5 min.
71. The consolidated net operating loss of the Parent Group includes all of the following except:
a. Parent’s operating income/loss.
b. Parent’s charitable contributions.
c. Parent’s dividends received deduction.
d. Subsidiary’s operating income/loss.
ANSWER: b
RATIONALE: The charitable deduction has its own carryover period.
POINTS: 1
DIFFICULTY: Easy

OTHER: Time: 5 min.
72. The Harris consolidated group reports a net operating loss (NOL) for the year. The tax law works to:
a. Allow unused charitable contributions a 20-year carryforward.
b. Disallow any carrybacks of NOL deductions.
c. Keep the consolidated group from benefiting when the election to consolidate is motivated chiefly by tax
reduction strategies.
d. All of the above statements describe effects of the consolidated return rules.
ANSWER: c
RATIONALE: Consolidated NOLs can be carried back two tax years. Charitable contributions are not
included in an NOL carryover.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
73. The Nanie consolidated group reported the following taxable income amounts. Parent owns all of the stock of both
Junior and Minor. Determine the net operating loss (NOL) that is apportioned to Minor.
Parent ($400,000)
Junior ($600,000)
Minor $100,000
a. $100,000.
b. $300,000.
c. $0. Minor did not report an NOL of its own.
d. $0. All NOLs of a consolidated group are apportioned to the parent.
ANSWER: c
RATIONALE: Only members with separate NOLs are apportioned any of the consolidated NOL.
POINTS: 2
DIFFICULTY: Easy
OTHER: Time: 5 min.
74. The Maestro consolidated group reported the following taxable income amounts. Parent owns all of the stock of both
Junior and Minor. Determine the net operating loss (NOL) that is apportioned to Parent.
Parent ($400,000)
Junior ($600,000)
Minor $100,000
a. $360,000.
b. $400,000.
c. $500,000.
d. $900,000. All NOLs of a consolidated group are apportioned to the parent.
ANSWER: a
RATIONALE: Parent’s separate NOL $400,000
Consolidated NOL
Aggregate separate NOL ×
$900,000 ×
$1,000,000
POINTS: 2
DIFFICULTY: Easy
OTHER: Time: 5 min.
75. ParentCo, SubOne and SubTwo have filed consolidated returns since Year 2. All of the entities were incorporated in
Year 1. Taxable income computations for the members include the following. None of the group members incurred any
capital gain or loss transactions during these years, nor did they make any charitable contributions.
ParentCo’s SubOne’s Taxable SubTwo’s Taxable Consolidated

Year Taxable Income Income Income Taxable Income
Year 1 $200,000 $ 50,000 $150,000 N/A
Year 2 $200,000 ($ 60,000) $ 70,000 $210,000
Year 3 $ 20,000 ($ 60,000) ($ 40,000) ?
Year 4 $200,000 $130,000 $ 10,000 ?
How should the Year 3 consolidated net operating loss be apportioned among the group members?
ParentCo SubOne SubTwo

a. $80,000 $0 $0
b. $ 0 $60,000 $40,000
c. $ 0 $40,000 $40,000
d. $ 0 $48,000 $32,000
ANSWER: d
RATIONALE: SubOne’s Apportioned NOL = $48,000
= $80,000 × [$60,000 ÷ ($60,000 + $40,000)]
SubTwo’s Apportioned NOL = $32,000
= $80,000 × [$40,000 ÷ ($60,000 + $40,000)]
POINTS: 3
76. ParentCo and SubOne have filed consolidated returns since Year 1. SubTwo was formed in Year 3 through an asset
spin-off from ParentCo. SubTwo has joined in the filing of consolidated returns since then. Taxable income computations
for the members include the following. None of the group members incurred any capital gain or loss transactions during
these years, nor did they make any charitable contributions.
ParentCo’s SubOne’s Taxable SubTwo’s Taxable Consolidated

Year Taxable Income Income Income Taxable Income
Year 2 $100,000 $ 50,000 N/A $150,000
Year 3 $ 30,000 ($ 30,000) $10,000 $ 10,000
Year 4 $ 50,000 ($ 40,000) ($40,000) ?
Year 5 $130,000 $130,000 $10,000 ?
If ParentCo does not elect to forgo the carryback of the Year 4 net operating loss, how much of that year's consolidated
net operating loss is carried back to offset prior years’ income?
a. $80,000
b. $40,000
c. $30,000
d. $0
ANSWER: c
RATIONALE: For a consolidated return, current year operating losses first are used to reduce the current
year income of the group and thereafter may be carried back or forward. The group has a net
operating loss for Year 4 of $30,000. Of this amount, $15,000 is allocable to SubOne
[$30,000 NOL × $40,000 ÷ ($40,000 + $40,000)], and $15,000 is allocable to SubTwo. The
Offspring Rule applies because SubTwo became a member of the group immediately upon its
incorporation. Accordingly, the group may carry back SubTwo’s Year 4 loss to offset the
group’s Year 2 consolidated taxable income, as well as SubOne’s, despite the fact that
SubTwo was not yet in existence.
POINTS: 3
77. Which of the following items is not computed on a consolidated basis?

a. Dividends received deduction.
b. Cost recovery deduction.
c. Charitable contributions.
d. Net capital losses.
ANSWER: b
RATIONALE: Each group member may continue to apply the depreciation methods best suited for its
needs.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
78. A consolidated group reports a net operating loss for the tax year. As a result:
a. The group carries the loss back 2 years and then forward 20 years.
b. The group carries the loss back 1 year and forward 5 years.
c. The group carries the loss forward 20 years, but no carryback is allowed.
d. The group carries the loss back 1 year and forward 20 years.
ANSWER: a
RATIONALE: Exhibit 8.4.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
79. Which of the following statements is true with regard to intercompany transactions?
a. An intercompany transaction is eliminated from consolidated taxable income.
b. All intercompany gains are recognized, but losses must be deferred.
c. A cash sale of a business asset by the purchasing member to an acquirer outside of the group triggers
immediate recognition of the gain or loss.
d. The gain or loss on an intercompany transaction is deferred for up to ten years, after which it is recognized.
ANSWER: c
RATIONALE: Both gains or losses on intercompany transactions are deferred until a restoration event
triggers the recognition of income.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
80. Subsidiary holds an allocated net operating loss (NOL) when it leaves the Parent consolidated group. As a result:
a. The group keeps Subsidiary’s allocated loss.
b. Subsidiary takes its allocated NOL and uses it on subsequent separate tax returns.
c. The loss is suspended for five years, in case Subsidiary rejoins the group; then Parent can use it.
d. The loss is suspended for five years, in case Subsidiary rejoins the group. At that time, Subsidiary uses the
loss on its separate return.
ANSWER: b
RATIONALE: The allocated loss belongs fully to Subsidiary.
POINTS: 1
DIFFICULTY: Medium
OTHER: Time: 5 min.
81. ParentCo purchased all of the stock of ChildCo on January 2, Year 2, and the two companies filed consolidated returns
for Year 2 and thereafter. Both entities were incorporated in Year 1. Taxable income computations for the members
include the following. Neither group member incurred any capital gain or loss transactions during these years, nor did
they make any charitable contributions. No § 382 limit applies.
ParentCo’s ChildCo’s Taxable Consolidated

Year 1 $100,000 ($ 75,000) N/A
Year 2 $100,000 ($ 40,000) $60,000
Year 3 $100,000 $ 10,000 ?
Year 4 $100,000 $125,000 ?
To what extent can ChildCo’s Year 1 losses be used by the group in Year 4?
a. $135,000
b. $125,000
c. $75,000
d. $10,000
e. $0
ANSWER: c
RATIONALE: The $40,000 Year 2 ChildCo loss is absorbed in the current year against ParentCo’s income.
Because the Year 1 loss arose in a separate return year, its use as a deduction against group
income is limited to the lesser of ChildCo’s current-year or cumulative positive contribution
to consolidated taxable income. For Years 2 and Year 3, this amount is less than zero. As of
the end of Year 4, ChildCo’s cumulative contribution to consolidated taxable income was
$95,000 = $40,000 loss for Year 2 + Year 3’s $10,000 income + Year 4’s income of
$125,000. Thus, all of the ChildCo Year 1 separate return year $75,000 loss can be deducted
against Year 4 income.
POINTS: 3
82. ParentCo purchased all of the stock of ChildCo on January 2, Year 2, and the two companies filed consolidated returns
for that year and thereafter. Both entities were incorporated in Year 1. Taxable income computations for the members
include the following. Neither group member incurred any capital gain or loss transactions during these years, nor did
they make any charitable contributions. No § 382 limit applies.
ParentCo’s ChildCo’s Taxable Consolidated

Year 1 $10,000 ($95,000) N/A
Year 2 $10,000 $50,000 ?
Year 3 ($25,000) $40,000 ?
Year 4 $10,000 $10,000 ?
Assuming that no election is made to forgo the carryback, to what extent are ChildCo’s Year 1 losses used by the group in
Year 2-Year 4?
a. $100,000
b. $95,000
c. $75,000
d. $0
ANSWER: c
RATIONALE: Losses from ChildCo’s Year 1 separate return year limitation return may only be used to the
lesser of ChildCo’s current-year or cumulative positive contribution to consolidated taxable
income. Therefore, $50,000 of ChildCo’s Year 1 loss is absorbed in Year 2, $15,000 in Year
3, and $10,000 in Year 4.
POINTS: 3
OTHER: Time: 5 min.
83. ParentCo and SubCo had the following items of income and deduction for the current year.
ParentCo’s SubCo’s Taxable
Item Taxable Income Income
Income (loss) from Operations $100,000 ($10,000)
§ 1231 Loss (5,000)
Capital Gain 15,000
Charitable Contribution 12,000
Compute ParentCo and SubCo’s taxable income or loss computed on a separate basis.
ParentCo SubCo
a. $85,000 $5,000
b. $85,000 $3,000
c. $85,500 $5,000
d. $85,500 $3,000
e. None of the above.
ANSWER: c
RATIONALE: ParentCo
Income from Operations $100,000
§ 1231 Loss (5,000)
$ 95,000
Charitable Contribution (10% TI limit) (9,500)
ParentCo’s Separate Taxable Income $ 85,500
SubCo
Income from Operations ($10,000)
Capital Gain 15,000
$ 5,000
Charitable Contribution –0–
SubCo’s Separate Taxable Income $ 5,000
Aggregate Separate Taxable Incomes $ 90,500
POINTS: 1
Income (loss) from Operations $100,000 ($10,000)
§ 1231 Loss (5,000)
Capital Gain 15,000
Charitable Contribution 12,000
Compute ParentCo and SubCo’s consolidated taxable income or loss.
a. $81,000
b. $88,000
c. $90,000
d. $90,500
ANSWER: c
RATIONALE: Income from Operations ($100,000 – $10,000) $ 90,000
§ 1231 and Capital Gains and Losses [($5,000) + $15,000] 10,000
$100,000
Consolidated Taxable Income $ 90,000
POINTS: 2
Income (loss) from Operations $100,000 $10,000
§ 1231 Loss (10,000)
Capital Gain 12,000
Charitable Contribution 20,000 1,000
ParentCo SubCo
a. $81,000 $21,000
b. $81,000 $22,000
c. $70,000 $22,000
d. $70,000 $21,000
ANSWER: a
RATIONALE: ParentCo
§ 1231 Loss (10,000)
$ 90,000
SubCo
Income from Operations $ 10,000
Capital Gain 12,000
$ 22,000
Charitable Contribution (actual payment, no limit) (1,000)
Aggregate Separate Taxable Incomes $102,000
POINTS: 3
Income (loss) from Operations $100,000 $10,000
§ 1231 Loss (10,000)
Capital Gain 12,000
a. $91,000
b. $100,800
c. $112,000

d. $122,000
ANSWER: b
RATIONALE: Income from Operations ($100,000 + $10,000) $110,000
§ 1231 and Capital Gains and Losses [($10,000) + $12,000] 2,000
$112,000
Consolidated Taxable Income $100,800
POINTS: 3
87. ParentCo and SubCo recorded the following items of income and deduction for the current tax year.

Income (Loss) from Operations $100,000 $20,000
§ 1231 Loss (8,000)
Capital Gain (Loss) (10,000) 14,000
ParentCo SubCo
a. $78,300 $30,600
b. $80,000 $33,000
c. $81,000 $33,000
d. $82,800 $30,600
e. $82,800 $33,000
ANSWER: e
RATIONALE: ParentCo
§ 1231 Loss (8,000)
Capital Loss (can only offset capital gains) –0–
$ 92,000
SubCo
Income from Operations $ 20,000
Capital Gain 14,000
$ 34,000
Charitable Contribution (actual payment) (1,000)
Aggregate Separate Taxable Incomes $115,800
POINTS: 2
88. ParentCo and SubCo recorded the following items of income and deduction for the current tax year.
Income (Loss) from Operations $100,000 $20,000
§ 1231 Loss (8,000)
Capital Gain (Loss) (10,000) 14,000
a. $95,000
b. $99,000
c. $104,400
d. $116,000
e. $120,000
ANSWER: c
RATIONALE: Income from Operations ($100,000 + $20,000) $120,000
Net capital gain 4,000
§ 1231 Loss (ordinary) (8,000)
$116,000
Consolidated Taxable Income $104,400
POINTS: 2
89. ParentCo’s separate taxable income was $200,000, and SubCo’s was $50,000. Consolidated taxable income before
contributions was $200,000. Charitable contributions made by the affiliated group included $60,000 by ParentCo and
$10,000 by SubCo. Compute the group’s maximum charitable contribution deduction.
a. $70,000
b. $60,000
c. $25,000
d. $20,000
ANSWER: d
RATIONALE: 10% × $200,000. Charitable contributions are a group item.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
90. ParentCo’s separate taxable income was $200,000, and JuniorCo’s was $50,000. Consolidated taxable income before
contributions was $200,000. Charitable contributions made by the affiliated group included $5,000 by ParentCo and
$1,000 by JuniorCo. Compute the group’s maximum charitable contribution deduction.
a. $0
b. $600
c. $6,000
d. $20,000
e. $25,000
ANSWER: c
RATIONALE: 10% × $200,000, but not to exceed the total gifts of $6,000.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
91. JuniorCo sells an asset to SeniorCo at a realized loss. That loss is not recognized by the group in the year of the sale,
because of the:
a. Wash sale rule.
b. Transfer pricing rules.
c. Matching rule.
d. Acceleration rule.
e. None of the above. The group deducts the loss.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy

OTHER: Time: 5 min.
92. A consolidated group reports a net operating loss that it carries forward to a later tax year. As a result:
a. The carryforward is discounted to its present value amount.
b. The present value of the tax benefits from the loss increases.
c. A GAAP deferred tax asset is created.
d. A GAAP deferred tax liability is created.
ANSWER: c
RATIONALE: See also text section 14-2b.
POINTS: 1
DIFFICULTY: Medium
OTHER: Time: 5 min.
93. A consolidated group reports a credit for research activities that it carries forward to a later tax year. As a result:
a. The present value of the tax benefits from the credit increases.
b. The carryforward is discounted to its present value amount.
c. A GAAP deferred tax liability is created.
d. A GAAP deferred tax asset is created.
ANSWER: d
RATIONALE: See also text section 14-2b.
POINTS: 1
DIFFICULTY: Medium
OTHER: Time: 5 min.
94. SubCo sells an asset to ParentCo at a realized gain. While ParentCo still holds the asset, SubCo leaves the
consolidated group. As a result:
a. The gain never is recognized.
b. SubCo recognizes the gain on its first tax return after leaving the group.
c. The group recognizes the gain, under the related party rules.
d. The group recognizes the gain, under the acceleration rule.
ANSWER: d
POINTS: 2
DIFFICULTY: Easy
OTHER: Time: 5 min.
95. One of the motivations for the consolidated return rules is to discourage conglomerates from trafficking in the
deductible ____________________ of other entities.
ANSWER: losses
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
96. Most of the rules governing the use of consolidated returns are found in tax ____________________, and not the
____________________.
ANSWER: regulations, Code
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
97. Deferring recognition of an intercompany gain is one ____________________ (advantage/disadvantage) of electing to

file consolidated returns.
ANSWER: advantage
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
98. The calendar year parent and affiliates must elect to file on a consolidated basis by ____________________ 15 after
the first consolidated tax year.
ANSWER: April
September (the extended Form 1120 due date for a calendar year corporation)
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.

99. A parent-subsidiary controlled group exists where there is ____________________ percent ownership of all of the
affiliates within the group, and there is an identifiable ____________________ corporation.
ANSWER: 80, parent
eighty, parent
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
100. When an affiliated group elects to file Federal consolidated income tax returns, it gives up the ability to claim a
____________________ deduction for distributions of profits paid to other members.
ANSWER: dividends received
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
101. Members of a parent-subsidiary controlled group must share one $40,000 ____________________ exemption for the
tax year.
ANSWER: AMT
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
102. In terms of the consolidated return rules, the Radcliffe Charitable Foundation is a(n) ____________________ entity.
ANSWER: ineligible
POINTS: 1
DIFFICULTY: Easy

OTHER: Time: 2 min.
103. Generally, when a subsidiary leaves an on-going consolidated group, it must wait ____________________ years
before it again can reenter the parent’s consolidated group.
ANSWER: five
5
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
104. Consolidated estimated tax payments must begin for the ____________________ (first, second, etc.) tax year after
the group’s election.
ANSWER: third
3rd
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
105. All members of an affiliated group have ____________________ and ____________________ liability for each
other’s Federal income tax liabilities.
ANSWER: joint, several
several, joint
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
106. Consolidated return members determine which affiliates will pay how much of the annual Federal income tax
liability by making a(n) ____________________ election.
ANSWER: tax-sharing
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
107. If, on joining an affiliated group, SubCo has a different tax year than that of ParentCo, SubCo must switch its year-
end to ParentCo’s by the end of the ____________________ (first, second, etc.) tax year after the election to consolidate.
ANSWER: first
1st
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
108. Within a Federal consolidated income tax group, SubOne ____________________ (can/cannot) use the LIFO
inventory method at the same time that SubTwo uses the FIFO method.
ANSWER: can
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
109. Dividends paid out of a subsidiary’s E & P to the parent cause a ____________________ (positive/negative)
adjustment to the parent’s stock basis of the subsidiary.
ANSWER: negative
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
110. When negative adjustments are made to the stock basis of the subsidiary that exceed the basis as of the beginning of
the tax year, a(n) ____________________ account is created, rather than giving the parent a negative tax basis in the
stock.
ANSWER: excess loss
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
111. If there is a balance in the excess loss account when a subsidiary’s stock is sold, the balance is recognized as
____________________ gain/income.
ANSWER: capital
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
112. The consolidated return rules combine the members’ transactions involving ____________________ items (e.g., §
1231 gain/loss) when computing consolidated taxable income.
ANSWER: group
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
113. In computing consolidated taxable income, a net capital gain/loss is an example of a(n) ____________________
item.
ANSWER: group
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
114. In computing consolidated taxable income, the profit/loss from a sale between Subsidiary and Parent is an example
of a(n) ____________________ item.
ANSWER: elimination
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
115. In computing consolidated taxable income, the purchase at a realized gain of a depreciable asset by Subsidiary from
Parent is an example of a(n) ____________________ transaction.
ANSWER: intercompany
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
116. The ____________________ rules can limit the net operating loss deduction claimed on a Federal consolidated
return.
ANSWER: separate return limitation year
SRLY
§ 382
Section 382
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
117. The treatment of group items on a Federal consolidated corporate income tax return ____________________
(always, sometimes, never) results in a reduction of consolidated taxable income.
ANSWER: sometimes
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.

118. The domestic production activities deduction (DPAD) of the affiliates is an example of an item that is computed on a
____________________ basis on a Federal corporate income tax consolidated return.
ANSWER: group
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
119. If one member sells an asset with a realized gain to another member of an affiliated group, any gain on the
transaction is not recognized at that time; such a deferral applies the ____________________ rule.
ANSWER: matching
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
120. In the year that the group terminates its consolidation election, a consolidated group’s deferred gain from an
intercompany asset sale between affiliates is recognized in full, under the ____________________ rule.
ANSWER: acceleration
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
121. ParentCo’s controlled group includes the following members. ParentCo owns all of the stock in each of the listed
entities. Which entities can join ParentCo in a consolidated return?
∙ SubCoA, a manufacturer incorporated in India.
∙ SubCoB, a U.S. manufacturer.
∙ SubCoC, a U.S. S corporation.
∙ SubCoD, a U.S. partnership.
∙ SubCoE, a U.S. limited liability company (LLC).
∙ SubCoF, a U.S. manufacturer incorporated in Puerto Rico.

∙ SubCoG, a U.S. manufacturer that claims a deduction for its production activities (DPAD).
∙ SubCoH, a U.S. tax-exempt museum.

ANSWER: ParentCo can include only its subsidiaries B and G on a consolidated return. The other
entities are not eligible to file on a consolidated basis.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
122. The Nannerl consolidated group reported the following taxable income amounts. Parent owns all of the stock of both
Junior and Minor. Determine the net operating loss (NOL) that is apportioned to Junior.
Parent ($400,000)
Junior ($600,000)
Minor $100,000
a. $500,000.
b. $540,000.
c. $600,000.
d. $0. All NOLs of a consolidated group are apportioned to the parent.
ANSWER: b
RATIONALE: Junior’s separate NOL $600,000
Consolidated NOL $900,000 ×
Aggregate separate NOLs $1,000,000
POINTS: 2
DIFFICULTY: Easy
OTHER: Time: 5 min.
123. The Parent consolidated group reports the following results for the tax year. Determine each member’s share of the
consolidated tax liability, assuming that the members all have consented to use the relative taxable income tax-sharing
method. Dollar amounts are listed in millions, and a 35% marginal income tax rate applies to all of the entities.
Parent SubOne SubTwo SubThree Consolidated

Ordinary income $600 $200 $ 60 ($30) $830
Capital gain/loss –0– –0– 20 (5) 15
§1231 gain/loss 130 –0– (55) –0– 75
($30), with a $5
Separate taxable
$730 $200 $ 25 capital loss
incomes
carryover
Consolidated
$920
taxable income
Consolidated tax
$322
liability
Energy tax credit,
(10)
from SubOne
Net tax due $312
ANSWER:
Consolidated tax liabilities are shared in the following manner.
Separate Taxable
Allocation Ratio Allocated Tax Due
Income
Parent $730 730/955 $239*
SubOne 200 200/955 65
SubTwo 25 25/955 8
SubThree –0– 0 –0–
Totals $955 $312
* $1 rounding error posted to Parent's allocated tax due.
POINTS: 3
124. The Parent consolidated group reports the following results for the tax year. Determine each member’s share of the
consolidated tax liability, assuming that the members all have consented to use the relative tax liability tax-sharing
method. Dollar amounts are listed in millions, and a 35% marginal income tax rate applies to all of the entities.
Parent SubOne SubTwo SubThree Consolidated

Ordinary income $600 $200 $60 ($30) $830
Capital gain/loss –0– –0– 20 (5) 15
§ 1231 gain/loss 130 –0– (55) –0– 75
($30), with a $5
Separate taxable
$730 $200 $25 capital loss
incomes
carryover
Consolidated
$920
taxable income
Consolidated tax
$322
liability
Energy tax credit,
(10)
from SubOne
Net tax due $ 312
ANSWER:
Consolidated tax liabilities are shared in the following manner.
Separate Taxable Separate Tax Allocation Allocated

Income Liability Ratio Tax Due
Parent $730 $255.5 255.5/324.25 $246
60, after applying
SubOne 200 60/324.25 58
energy tax credit
SubTwo 25 8.75 8.75/324.25 8
SubThree –0– –0– 0 –0–
Totals $955 $324.25 $312
POINTS: 3
125. TopCo owns all of the stock of BottomCo. Both taxpayers are subject to the alternative minimum tax (AMT) this
year for the first time, due to a dependence on accelerated MACRS deductions. The corporations incurred no
intercompany transactions during the year. TopCo has a consolidation election in effect for the group.
If the affiliates were to file separate Forms 1120 this year, the following amounts would be reported.
TopCo’s adjusted current earnings $2,000,000

TopCo’s AMT income before the ACE adjustment 1,200,000
BottomCo’s adjusted current earnings 500,000
BottomCo’s AMT income before the ACE adjustment 1,000,000
a. Compute the ACE adjustment for the consolidated group.
b. Comment on the effects of the consolidation election on the companies’ AMT liabilities.
ANSWER:
.75 × ($2,500,000 Consolidated ACE – $2,200,000 Consolidated Pre-ACE AMTI) =
a.
$225,000 Consolidated ACE adjustment.
When the ACE adjustment is computed on a consolidated basis, BottomCo’s “unused”

excess AMTI is offset against TopCo’s adjusted current earnings, and the aggregate
b.
ACE adjustment is reduced by $375,000 due to the consolidation. To the extent that
this relationship continues, TopCo and BottomCo are attractive consolidation partners.
∙ TopCo’s separate ACE adjustment = $600,000 = .75 × ($2,000,000 – $1,200,000)
BottomCo’s separate ACE adjustment = ($375,000) = .75 × ($500,000 –

∙ $1,000,000), but not usable to reduce AMTI because BottomCo has reported zero
positive ACE adjustments in prior years.
POINTS: 2

126. Calendar year Parent Corporation acquired all of the stock of SubCo on January 1, Year 1, for $500,000.
The subsidiary’s operating gains and losses are shown below. In addition, a $50,000 dividend is paid early in
Year 2.
Complete the following chart, indicating the appropriate stock basis and excess loss account amounts.
Excess
Operating Stock
Year Loss
Gain/Loss Basis
Account
1 ($100,000) ? ?
2 ($150,000) ? ?
3 $300,000 ? ?
ANSWER: Operating Excess Loss
Year Gain/(Loss) Stock Basis Account
1 ($100,000) $400,000 $0
$200,000, reflecting $50,000
2 ($150,000) $0
dividend paid
3 $300,000 $500,000
$0
POINTS: 2
127. LargeCo files on a consolidated basis with LittleCo. The subsidiary was acquired for $400,000 on January 1, Year 1,
and it paid a $75,000 dividend to LargeCo at the end of both Year 2 and Year 3.
a. Given the following information about the subsidiary’s operating results, derive
the requested amounts as of December 31 of each year. The group files using a
calendar year.
LargeCo’s
LittleCo’s
Investment in LittleCo
Operating Stock Excess Loss
Year Gain/(Loss) Basis Account
1 ($125,000) ? ?
2 ($300,000) ? ?
3 $50,000 ? ?
LargeCo sold LittleCo to an unrelated competitor for $600,000 on December 31, Year 3.
b.
How will LargeCo account for this sale?
ANSWER: a. Year 1 Stock basis $275,000; excess loss account $0
$100,000, reflecting $75,000 dividend
Year 2 Stock basis $0; Excess loss account
paid
$125,000, reflecting $75,000 dividend
Year 3 Stock basis $0; Excess loss account
paid
Capital gain income to the extent of the excess loss account plus the amount realized on
b.
the sale = $725,000.
POINTS: 2
128. In the current year, Parent Corporation provided advertising services to its 100%-owned subsidiary, SubCo, under a
contract that requires no payments to Parent until next year. Both parties use the accrual method of tax accounting and a
calendar tax year. The services that Parent rendered were valued at $250,000. In addition, Parent received $20,000 of
interest payments from SubCo., relative to an arm’s length note between them.
Including these transactions, Parent’s taxable income for the year amounted to $400,000. SubCo reported $200,000
separate taxable income. Derive the group’s consolidated taxable income, using the format of Exhibit 8.3.
Separate Post-
Taxable Adjustment
Income Adjustments Amounts
ParentCo Information
SubCo Information
Group-Basis
Transactions
Intercompany
Events
Consolidated
Taxable Income
NOTES
ANSWER: No eliminating adjustments are required of the group. The members’ deductions incurred
offset the income included by the other party to the intercompany transaction (e.g.,
consolidated taxable income includes both ParentCo’s gross interest income and SubCo’s
deduction therefor), so a financial accounting-style elimination results from the use of the
consolidated taxable income computation itself. The services transaction is reported next year
by both parties, when the services are rendered.
Separate Post-Adjustment
Taxable Income Adjustments Amounts
ParentCo
$400,000 $400,000
Information
SubCo Information
$200,000 $200,000
Group-basis
Transactions
Intercompany
Events
Consolidated
$600,000
Taxable Income
POINTS: 1
OTHER: Time: 5 min.
129. For each of the indicated tax years, compute consolidated taxable income for the calendar year Holloway Group,
which elected consolidated status immediately upon creation of the two member corporations in January Year 1. All
recognized income related to the data processing services of the firms. No intercompany transactions were completed
during the indicated years.
Tax Year Holloway Corporation Olson Corporation

Year 1 $250,000 ($ 70,000)
Year 2 250,000 (120,000)
Year 3 250,000 (180,000)
Year 4 250,000 110,000
ANSWER:
Consolidated taxable income
Year 1 $180,000
Year 2 $130,000
Year 3 $ 70,000
Year 4 $360,000
The Olson losses offset the Holloway income dollar for dollar, but they do not become large
enough to produce a consolidated loss. Because both corporations produce ordinary income,
there are no adjustments to make using the format of Exhibit 8.3. There are no consolidated
NOL carryovers in any of the specified years.
POINTS: 2
DIFFICULTY: Easy

OTHER: Time: 5 min.
130. For each of the indicated tax years. compute consolidated taxable income for the calendar year Whitman Group,
which elected consolidated status immediately upon creation of the two member corporations in January Year 1. All
recognized income related to the data processing services of the firms. No intercompany transactions were completed
during the indicated years.
Tax Year Whitman Corporation Draper Corporation

Year 1 $250,000 $ 90,000
Year 2 250,000 (170,000)
Year 3 250,000 (560,000)
Year 4 250,000 145,000
ANSWER:
It is assumed that the group does not elect to forgo the carryback of the Year 3 consolidated
net operating loss.
Consolidated taxable income
Year 1 $340,000
Year 2 $ 80,000
Year 3 $ –0– ($310,000) NOL carryback to generate refund from Year 1 group tax
liability.
Year 4 $395,000
POINTS: 2
DIFFICULTY: Easy
OTHER: Time: 5 min.
131. Parent Corporation, SubOne, and SubTwo have filed consolidated returns since Year 2. All of the entities were
incorporated in Year 1. None of the group members incurred any capital gain or loss transactions during any of the
following tax years, nor did they make any charitable contributions. Taxable income computations for the members are
listed below.
Parent’s SubOne’s SubTwo’s Consolidated

Taxable Taxable Taxable Taxable
Year Income Income Income Income
Year 1* $100,000 $100,000 $260,000 N/A
Year 2** $100,000 $100,000 ($ 60,000) $140,000
Year 3** $100,000 ($80,000) ($250,000) ?
Year 4** $100,000 $120,000 $300,000 ?
* Separate return year.
** Consolidated return year.
How much of the Year 3 loss is apportioned to SubOne and SubTwo? How is this loss treated
a.
in generating a refund of prior tax payments?
b. Why would Parent consider electing to forgo the carryback of the Year 3 consolidated NOL?
c. In this light, analyze the election to consolidate.

ANSWER: a. Lacking an election by ParentCo to forgo the carryback of the Year 3 consolidated net
operating loss of $230,000, both subsidiaries can carry losses back to the Year 1 separate
return years and receive separate refunds.
∙ SubOne can carry back a $55,758 loss [(SubOne’s NOL $80,000 ÷ Aggregate NOLs
$330,000) × Consolidated NOL $230,000].
∙ SubTwo can carry back a $174,242 loss [($250,000 ÷ $330,000) × $230,000].
SubOne and SubTwo both would file for refunds of taxes that result from the carryback,
and they would receive directly the refunded tax dollars.
b. If ParentCo elected to forgo the carryback of the Year 3 consolidated loss, the deduction
therefore would be preserved for subsequent consolidated years. Furthermore, any
resulting tax reduction or refund would be received by ParentCo, presumably to be
shared by the entire electing group, including ParentCo.
c. The election must be analyzed relative to the present value of the tax savings generated
by the purchased NOLs. The longer that one must wait to deduct the NOLs, the lower
their present value, and the less attractive is an election to consolidate.
POINTS: 1
132. The group of Parent Corporation, SubOne, and SubTwo has filed a consolidated return since Year 2. The first two
entities were incorporated in Year 1, and SubTwo came into existence in Year 2 through an asset spin-off from Parent.
Taxable income computations for the members are shown below. None of the group members incurred any capital gain or
loss transactions during any of the following any of the following years, nor did they make any charitable contributions.
Describe the treatment of the group’s Year 3 consolidated NOL. Hint: Apply the offspring rule.
Parent’s SubOne’s SubTwo’s Consolidated

Taxable Taxable Taxable Taxable
Year Income Income Income Income
Year 1 $200,000 $ 70,000 - $270,000
Year 2* $ 90,000 $ 20,000 ($ 40,000) $ 70,000
Year 3* $ 90,000 ($ 80,000) ($ 40,000) ?
Year 4* $ 90,000 $100,000 $210,000 ?
* Consolidated return year.
ANSWER: Lacking an election by ParentCo to forgo the carryback of the Year 3 consolidated net
operating loss of $30,000, SubOne can carry back to Year 1 its $20,000 apportioned loss
($80,000/$120,000 × $30,000 group NOL), to be deducted against previously computed
consolidated taxable income.
SubTwo’s $10,000 share of the loss also can be carried back to Year 1 and used by the
consolidated group. Under the Offspring Rule, SubTwo is treated as being a member of the
group for the entire group carryback period, because its existence is rooted in ParentCo’s
assets.
POINTS: 1
133. Parent Corporation’s current-year taxable income included $100,000 net profit from operations and a $30,000 net
long-term capital gain. Parent also made a $22,000 contribution to State University. SubCo produced $85,000 of income
from operations and incurred a $25,000 net short-term capital loss.
Use the computational worksheet of Exhibit 8.3 to derive the group members’ separate taxable incomes and the group’s
Separate Post-
Taxable Adjustment
Income Adjustments Amounts
ParentCo Information
SubCo Information
Group-Basis
Transactions
Intercompany
Events
Consolidated
Taxable Income
NOTES
ANSWER: ParentCo’s separate taxable income amounts to $117,000.
Income from operations $100,000

Capital gain income 30,000
Less: Charitable contribution (10% TI limit) (13,000)
Separate taxable income $117,000
SubCo’s separate taxable income was $85,000, because the net capital loss is not deductible.
Thus, the aggregate separate taxable incomes for the group amounted to $202,000.
Upon consolidation, a greater amount of ParentCo’s charitable contribution becomes
deductible, and its capital gain is sheltered from current-year tax by SubCo’s net capital loss.
The group holds a $3,000 charitable contribution carryforward. Aggregate taxable income is
reduced by $31,000.
Separate Post-
Taxable Adjustment
Income Amounts
Adjustments
– $30,000 capital gain income**
ParentCo Information $117,000 + $13,000 charitable contribution $100,000
deduction**
SubCo Information $ 85,000 $25,000 short-term capital loss** $ 85,000
$5,000 net long-term capital gain
Group-Basis – $22,000 charitable contribution $ 5,000
Transactions (group’s 10% maximum ($ 19,000)
deduction)**
Intercompany
Events
Consolidated
$171,000
Taxable Income
NOTES
* Permanent Eliminations
** Group-Basis Transaction
† Matching Rule
POINTS: 3
134. How many consolidated tax returns are filed annually? What types of taxpayer do they represent?
ANSWER: Of the roughly 1.6 million corporations filing Forms 1120, fewer than 40,000 file
consolidated Federal income tax returns. These entities represent the vast majority of the
country’s assets and sales revenues. Consolidated returns claim virtually all of the allowed
foreign tax credits.
POINTS: 1
DIFFICULTY: Easy

OTHER: Time: 5 min.
135. List some of the non-tax reasons that groups of corporations form conglomerates and may be eligible also to file
consolidated Federal income tax returns.
ANSWER: Conglomerates are formed to reduce overall tax liabilities, but also to:
∙ isolate the assets of some affiliates from the liabilities of others,
∙ preserve intangible assets such as trade names,
∙ accomplish estate planning objectives, and
∙ expand into global markets.

POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
136. Where are the controlling Federal income tax rules regarding consolidated tax returns to be found? What is the
general philosophy of those rules? Do they tend to be pro- or anti-taxpayer?
ANSWER: Most of the rules controlling the use of consolidated Federal tax returns are found in the
extensive Regulations under IRC §§ 1501-1504. The rules are designed to limit the tax
advantages that otherwise might be available to affiliated groups of corporations. The
Treasury seems to want to discourage profitable corporations from “trafficking” in the shares
of businesses that generate deductible net losses and tax credits.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
137. The consolidated income tax return rules apply only for Federal tax purposes. Financial accounting rules can be quite
different from the corresponding tax rules, but the tax professional should be familiar with both sets of requirements.
Describe the major differences between the book and tax treatment for the conglomerate’s reporting of:
a. The ownership levels required to consolidate.
b. Goodwill.
c. The entities included on the report.

ANSWER: Generally, GAAP consolidation is mandatory when greater than 50% ownership is
a.
attained. Tax consolidation is elective when 80% or greater ownership is attained.
For financial accounting purposes, goodwill is not amortized, but if the value of the
goodwill changes during the year, the impairment (a decrease in the value of the
b. goodwill, an expense item) or the reversal of a prior impairment (a revenue item) is
recorded on the income statement. Under the tax rules, purchased goodwill is amortized
over 15 years.
A Federal consolidated tax return includes only U.S. corporations. Non-U.S. and non-
c.
corporate entities can be included in the conglomerate’s financial statements.
POINTS: 1
DIFFICULTY: Easy
KEYWORDS: Bloom's: Analysis
OTHER: Time: 5 min.
138. Outline the major advantages and disadvantages of filing Federal corporate income tax returns on a consolidated
basis. Limit your comments to the income tax effects of the election.
ANSWER: Assessing only the Federal income tax aspects of the consolidation election, the major
advantages include the following.
Application of operating and capital losses of one member against the gains/income of
∙
others
∙ Elimination of all tax liabilities on intercompany dividends
∙ Deferral of gains from certain intercompany transactions
∙ Optimization of the group’s § 199 domestic production activities deduction
∙ Optimization of other deductions, losses, and credits computed on a group basis
∙ Optimization of the group’s AMT attributes
∙ Optimization of the group’s estimated tax payments
∙ Creation of basis in subsidiary stock when net gains are recognized by the group
Major Federal income tax disadvantages relative to the consolidation election include the
following.
The binding status of the election, and the five-year cooling-off period after termination
∙
thereof
∙ Deferral of losses from certain intercompany transactions

∙ Loss of basis in subsidiary stock when net losses are recognized by the group
Standardization of the tax year, perhaps resulting in income bunching and loss of
∙
flexibility
Additional costs incurred to meet compliance and administrative requirements, which

∙
can be burdensome
POINTS: 1
DIFFICULTY: Easy
139. Certain business entities are ineligible to join an affiliated group and file a consolidated Federal income tax return.
List three or more entities that cannot be part of a Federal consolidated tax return group.
ANSWER: These are some of the entities ineligible for membership in a consolidated group.
∙ Non-U.S. entities
∙ Tax exempt entities
∙ Insurance companies
∙ Partnerships, trusts, estate, and limited liability entities
∙ Any non-corporate entity

POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
140. When a corporate group elects to file Federal income tax returns on a consolidated basis, it is subject to several tax
return filing requirements for its first and subsequent tax years. List the most important of those requirements.
ANSWER: The major filing requirements for a Federal consolidated group include the following.
∙ File the Form 1120 using consolidated taxable income.
File Form 1122 listing the group members consenting to the election to
∙
consolidate, with the first consolidated return.
File Form 851, another less-detailed listing of the affiliates joining the
∙
return, with all subsequent consolidated 1120s.
POINTS: 1

DIFFICULTY: Easy
OTHER: Time: 5 min.
141. Gold and Bronze elect to form a Federal consolidated group. Gold, the parent entity, uses a calendar tax year, while
Bronze’s tax year ends on March 31. Which tax year(s) does the new consolidated group use?
ANSWER: Affiliates must switch to the parent’s tax year, but they can continue to use their existing tax
accounting methods. Often, a short tax year is created when a new affiliate joins the parent’s
group.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
142. Gold, Silver, and Bronze constitute a Federal consolidated tax return group. Which of the members is responsible to
pay the tax liability—the parent, the subsidiaries, or both? How are these tax-payable amounts determined? Hint: Use the
term tax-sharing agreement in your answer.
ANSWER: All affiliates are responsible for the total Federal corporate income tax liability of the group,
on a joint and several basis. This rule applies to income tax penalties and interest, as well as
to any tax audit settlements that are completed during the year.
Starting with the third tax year of an electing consolidated group, estimated income tax
payments are made on a consolidated basis.
In assigning shares of the total Federal corporate income tax liability among group members,
say for purposes of computing an affiliate’s E & P balance, the “relative taxable income” and
“relative tax liability” methods often are used. Other methods also are allowed by the
regulations.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
143. Discuss how a parent corporation computes its stock basis for a subsidiary that joins in a Federal consolidated
income tax return.
ANSWER: The initial basis of the subsidiary is recorded at its acquisition price. If the acquisition takes
place as part of a tax-deferred reorganization (see Chapter 7), the amount may be computed
as a carryover or substituted basis. The basis is adjusted for the operations of the group. For
instance, stock basis is increased by the following items.
∙ An allocable share of consolidated taxable income.
An allocable share of the unused portion of the subsidiary’s NOL or net

∙
capital loss.
Negative adjustments to stock basis include the following.
∙ An allocable share of a negative consolidated taxable income.
Dividends paid by the subsidiary to the parent out of subsidiary earnings

∙
and profits.
∙ An allocable share of deductible carryover NOLs and net capital losses.

The parent must maintain detailed documentation as to the stock basis of each of its
subsidiaries.
POINTS: 1
DIFFICULTY: Easy
144. Parent’s basis in the stock of Child, its subsidiary, is $1 million at the beginning of the year. Child’s share of
consolidated taxable income this year is a $1.25 million operating loss. Parent’s basis in the Child stock now is zero.
Explain.
ANSWER: The parent’s tax basis in the stock of the subsidiary cannot be a negative amount. If
excessive taxable losses are incurred to the point that stock basis is zero, the tax law might
hold that no further losses can be deducted. This is the case with flow-through losses of an S
corporation or partnership.
The consolidated return rules do not work this way. Subsidiary losses can continue to be
deducted, and an excess loss account is generated to account for these amounts. If the
parent disposes of the subsidiary stock when an excess loss account exists, capital gain is
reported by the parent to the extent of its balance.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
145. Describe the general computational method used by a Federal consolidated group in computing taxable income.
ANSWER: Consolidated taxable income is determined in the following manner.
∙ Taxable income is computed for each group member on a separate basis.
Certain transactions are accounted for on a group basis, using group

∙
floors, ceilings, and other computational limits. These items include capital

gain/loss and charitable contributions.
Realized gain/losses from most intercompany transactions are deferred

∙
until later tax years.
A few intercompany transactions (such as dividend payments) are

∙
eliminated from all computations of taxable income.
POINTS: 1
DIFFICULTY: Easy
146. ParentCo owns all of the stock of both SubOne and SubTwo. List three “intercompany transactions” that might occur
among the three members of the consolidated filing group.
ANSWER: Illustrative intercompany transactions include the following.
∙ SubOne purchases accounting and data processing services from Parent.
∙ SubTwo pays a regular cash dividend to Parent.
∙ SubOne pays a regular dividend to Parent, using an asset with a realized gain to SubOne.
∙ Parent sells to SubTwo an asset with a realized loss to Parent.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
147. A Federal consolidated group reports a net operating loss for the year. How is this amount allocated to the various
group members? Why is this allocation important?
ANSWER: Each year, the total consolidated loss is allocated as follows.
Member’s separate NOL

Consolidated NOL × = Member’s apportioned NOL
Members’ aggregate NOLs
This allocation of a consolidated operating loss among the affiliates is important when an
affiliate is disposed of or leaves the group. In such cases, it takes its share of the loss to its
next tax return.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
148. The consolidated tax return regulations use “SRLY” limitations with respect to losses of a subsidiary that can be
deducted on the consolidated return. Describe the various SRLY rules that might apply to a consolidated group member’s
losses.
ANSWER: The SRLY limits generally work this way.
Loss Year Deduction Year Applicable Rules
Regular NOL rules—Carryback 2
Consolidated Consolidated years, carryforward 20 years. Can
elect to forego carryback.
Carryback/forward only the member’s
apportioned loss to its separate return.
Consolidated Separate Departing member takes its
apportioned loss with it to the separate
return.
New member’s NOL carryforward is
available to the group only to the
extent of the new member’s
Separate Consolidated
cumulative positive contribution to
consolidated taxable income. Section
382 rules also may apply.
POINTS: 1
149. The “SRLY” and § 382 limitation rules for Federal consolidated tax returns are designed to keep corporations from
“trafficking” their net operating losses. These rules are restrictive and somewhat complex. Explain why these rules exist,
and how they interact if both apply in the same tax year.
ANSWER: The separate return limitation rule (SRLY) rules are designed to keep Federal consolidated
return members from acquiring new affiliates chiefly to obtain tax loss and credit carryovers.
When, for instance, an NOL is carried forward from a separate return year onto a
consolidated return that now includes an acquired loss corporation, the consolidated return
can include the loss corporation’s loss from pre-consolidation (separate-return) years only to
the extent of the lesser of its (1) current-year, or (2) cumulative positive contribution to
The SRLY rules never apply to the consolidated group’s parent corporation.
POINTS: 1
150. Certain tax return items are computed on a group basis when a Federal consolidated return election is in place. List
five or more of these group-basis items.
ANSWER: The following items are among those that are computed on a group basis for a Federal
corporate consolidated income tax return.
∙ Net long-term capital gain/loss
∙ Net short-tem capital gain/loss
∙ § 1231 gain/loss
∙ AMT adjustments and preferences
∙ Domestic production activities deduction
∙ Casualty/theft gain/loss
∙ Charitable contributions
∙ Dividends received deduction
∙ Net operating loss
POINTS: 1
151. Members of the ABCD Federal consolidated group conduct various transactions with each other during the tax year.
These include the purchase/sale of land and depreciable assets, the licensing of intangible assets, and the conduct of
service arrangements. How does the tax law account for these intercompany items? In your answer, be sure to use the
terms matching rule and acceleration rule at least once each.
ANSWER: Gain or loss realized on property transactions between affiliates may not be recognized
immediately. If more than one tax year is involved, the recognized gain or loss is deferred
under the matching rule until the sold asset leaves the affiliated group, i.e., by a subsequent
sale to a non-affiliated third party. This prevents group members from manipulating
consolidated taxable income merely by moving assets among the members.
The acceleration rule works with respect to a deferred gain/loss when one of the affiliates
involved in the transaction leaves the group, or if the consolidation election is terminated. At
that time, full gain or loss recognition is triggered.
POINTS: 1
152. Forming a Federal consolidated tax return group is a discretionary action by eligible affiliates. List several tax
attributes and situations that might make a subsidiary an attractive partner for a parent corporation on a consolidated
return.
ANSWER: Taxpayers should optimize their overall tax benefits when choosing consolidated return
partners. Within the limitations of the Code and of the non-tax parameters of the
corporation’s business, target corporations might include those with appropriate amounts of
the following.
∙ Loss and credit carryovers
∙ Passive activity income, losses, and credits
∙ Gains that can be deferred through intercompany sales
∙ Contributions to corporate ACE adjustments
∙ Excess limitation amounts (e.g., concerning charitable contributions).
∙ Section 1231 gains, losses, and look-back profiles.

POINTS: 1
Match each of the following terms with the appropriate description, in the context of a consolidated Federal income tax
return.
a. Advantage of consolidating
b. Disadvantage of consolidating
c. Neither an advantage nor a disadvantage
DIFFICULTY: Easy
OTHER: Time: 2 min.
153. Tax compliance deadlines and recordkeeping

ANSWER: b
POINTS: 1
154. Offsetting gains against other members’ losses

ANSWER: a
POINTS: 1
155. Loss deferral on intercompany transactions

ANSWER: b
POINTS: 1
156. Gain deferral on intercompany transactions

ANSWER: a
POINTS: 1

157. A new affiliate uses the LIFO method for inventories
ANSWER: c
POINTS: 1
158. Binding nature of election over multiple tax years

ANSWER: b
POINTS: 1
159. Tax treatment of operating losses when the basis of the payor’s stock is zero
ANSWER: b
POINTS: 1
160. Joint and several liability for Federal income tax

ANSWER: b
POINTS: 1
161. Choice of tax year-ends by affiliates

ANSWER: b
POINTS: 1
Match each of the following items with the appropriate description, indicating whether the item increases or decreases
the parent’s basis in the stock of a subsidiary.
a. Increases stock basis of subsidiary
b. Decreases stock basis of subsidiary
c. No effect on stock basis of subsidiary
DIFFICULTY: Easy
OTHER: Time: 2 min.
162. Member’s operating loss

ANSWER: b
POINTS: 1
163. Member’s operating loss, when stock basis = $0

ANSWER: c
POINTS: 1
164. Member’s operating gains/profits

ANSWER: a
POINTS: 1
165. Increase in affiliate’s E & P

ANSWER: c
POINTS: 1
166. Dividend paid to parent out of affiliate’s E & P

ANSWER: b
POINTS: 1
167. Member’s capital gain

ANSWER: a
POINTS: 1
Match each of the following items with the appropriate description, indicating whether the item’s treatment for financial
accounting and Federal income tax purposes is the same or not.
a. Tax and book treatment is the same
b. Tax and book treatment differ
DIFFICULTY: Easy
OTHER: Time: 2 min.
168. Ownership level of parent at which a subsidiary can join the consolidated group.
ANSWER: b
POINTS: 1
169. Parent owns 100% of a U.S. partnership and wants the entity to join the consolidated group.
ANSWER: b
POINTS: 1
170. Parent owns 100% of a Brazil corporation and wants the entity to join the consolidated group.
ANSWER: b
POINTS: 1
171. Joining the consolidated group is mandatory if ownership requirements are met by the entities.
ANSWER: b
POINTS: 1
172. Sales amounts (after returns and allowances) are combined in the consolidation process.
ANSWER: a
POINTS: 1
Match each of the following items with the appropriate description, indicating whether the item is computed on a group
basis on a consolidated tax return.
a. Group item

b. Not a group item
DIFFICULTY: Easy
OTHER: Time: 2 min.
173. Compensation deductions

ANSWER: b
POINTS: 1
174. Domestic production activities deduction

ANSWER: a
POINTS: 1
175. Net operating loss

ANSWER: a
POINTS: 1
176. Charitable contributions

ANSWER: a
POINTS: 1
177. Dividends received deduction

ANSWER: a
POINTS: 1
178. Interest income from Detroit School District bonds

ANSWER: b
POINTS: 1

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The Project Gutenberg eBook of The Berkeleys
and their neighbors
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eBook.
Title: The Berkeleys and their neighbors
Author: Molly Elliot Seawell
Release date: June 11, 2022 [eBook #68290]
Language: English
Original publication: United States: D. Appleton and Company,

1888
Credits: D A Alexander and the Online Distributed Proofreading

Team at https://www.pgdp.net (This file was produced
from images generously made available by University
of California libraries)
*** START OF THE PROJECT GUTENBERG EBOOK THE

BERKELEYS AND THEIR NEIGHBORS ***
THE BERKELEYS
AND THEIR NEIGHBORS
BY
MOLLY ELLIOT SEAWELL

AUTHOR OF THROCKMORTON, MAID MARIAN, LITTLE JARVIS,
MIDSHIPMAN PAULDING, ETC.
REVISED EDITION
NEW YORK
D. APPLETON AND COMPANY
1892
Copyright, 1888,
By M. ELLIOT SEAWELL.
Copyright, 1892,
By D. APPLETON AND COMPANY
Printed at the
Appleton Press, U. S. A.
BY THE SAME AUTHOR.
THROCKMORTON. 12mo. Paper, 50

cents; cloth, $1.00.
“The incidents are of great interest,
well-imagined, and admirably carried out.
But the notable feature of the book is the
rare charm of its literary expression. The
language is full of grace and wit and
delicate sensibility. To read is to be
beguiled.”—New York Sun.
“The pages of ‘Throckmorton’ are
alive with picturesque sketches. Its
humor is never forced, and its pathos is
never overdone. It is a novel to linger
over.”—The Critic.
“A charming story. The author has
used good English, and the reader yields
to the fascination of her style.”—The
Book Buyer.
MAID MARIAN, and other Stories.
12mo. Paper, 50 cents; cloth, $1.00.
“There is an unmistakable cleverness
in this collection of short stories.”—
Boston Literary World.
“Miss Seawell has a brisk and prolific
fancy, and a turn for the odd and
fantastic, while she is Past Master in the
use of negro dialect and the production
of tales of plantation life and manners. All
these stories are spirited, well marked by
local color, and written with skill and
ingenuity.”—New York Tribune.
MIDSHIPMAN PAULDING. A true story
of the War of 1812. With Six full-page
Illustrations. 8vo. Bound in blue cloth,
with special design in gold and colors.
$1.00.
“The story is told in a breezy,
pleasant style that can not fail to capture
the fancy of young readers, and imparts
much historical knowledge at the same
time, while the illustrations will help the
understanding of the events described. It
is an excellent book for boys, and even
the girls will be interested in it.”—
Brooklyn Standard-Union.
LITTLE JARVIS. The story of the heroic
midshipman of the frigate “Constellation.”
With Six full-page Illustrations. 8vo.
Bound uniformly with “Midshipman
Paulding.” $1.00.
“Not since Dr. Edward Everett Hale’s
classic, ‘The Man without a Country,’ has
there been published a more stirring
lesson in patriotism.”—Boston Beacon.
“It is what a boy would call ‘a real
boy’s book.’”—Charleston News and
Courier.
D. APPLETON & CO., Publishers, New

York.
THE BERKELEYS AND THEIR NEIGHBORS.
CHAPTER I.
A provincial Virginia race-course is an excellent place to
observe a people which has preserved its distinctiveness as well as
the Virginians. So far, they have escaped that general and fatiguing
likeness which prevails in most of the universe these days.
Therefore, the Campdown race-course, on a golden day in
October, looked like itself and nothing else. The track had started out
with the intention of making a perfect ellipse, but meeting a steep
incline, it saved the trouble of bringing up the grade, by boldly
avoiding the obstacle—so the winning post was considerably nearer
the half-mile than the starting post was. Nobody objected to a little
thing like this, though. The Virginians are good-natured creatures,
and seldom bother about trifles.
It was the fall meeting of the Campdown Jockey Club—a famous
institution “befo’ the war.”
At this time the great awakening had not come—the war was not
long over. For these people, had they but known it, the end of the
war really meant the end of the world—but the change was too
stupendous for any human mind to grasp all at once. There came a
period of shock before the pain was felt, when the people, groping
amid the ruins of their social fabric, patched it up a little here and a
little there. They resumed in a dazed and incomplete way their old
amusements, their old habits and ways of life. They mortgaged their
lands—all that was left to them—with great coolness and a
superstitious faith in the future—Virginians are prone to hanker after
mortgages—and spent the money untroubled by any reflections
where any more was to come from when that was gone.
They were intense pleasure lovers. In that happy afternoon haze
in which they had lived until the storm broke, pleasure was the chief
end of man. So now, the whole county turned out to see two or three
broken-down hacks, and a green colt or two, race for the mythical
stakes. It is true, a green silk bag, embroidered in gold, with the
legend “$300” hung aloft on a tall pole, for the sweepstakes, but it
did not contain three hundred dollars, but about one-half of it in gold,
and a check drawn by the president of the Jockey Club against the
treasurer for the balance. Most of the members had not paid their
dues, and the treasurer didn’t know where the money was to come
from, nor the president either, for that matter; but it takes a good deal
to discount a Virginian’s faith in the future. The public, too, was fully
acquainted with the state of affairs, and the fact that there was any
gold at all in the bag, would eventually be in the nature of a pleasant
surprise.
The people, in carriages, or on horseback, bore little
resemblance to the usual country gathering. They were gentlepeople
tinged with rusticity. All of them had good, high sounding Anglo-
Saxon names. There was some magnificence of an antique pattern.
One huge family ark was drawn by four sleek old horses, with a
venerable black coachman on the box, and inside a superb old lady
with a black veil falling over her white hair. There were but two really
correct equipages in the field. One was a trim, chocolate-colored
victoria, with brown horses and a chocolate-colored coachman to
match. In it sat a showy woman, with a profusion of dazzling blonde
hair, and beside her was an immaculately well dressed blonde man.
The turnout looked like a finely finished photograph among a lot of
dingy old family portraits.
The other carriage that would have passed muster was a large
and handsome landau, respectfully called “the Isleham carriage,”
and in it sat Colonel Berkeley and his daughter Olivia. The Colonel
was a genuine Virginia colonel, and claimed to be the last man in the
State to wear a ruffled shirt bosom. A billowy expanse of thread
cambric ruffles rushed out of his waistcoat; his snow white hair was
carefully combed down upon his coat collar. At the carriage door
stood his double—an elderly negro as grizzled as his master, to
whom he bore that curious resemblance that comes of fifty years
association. This resemblance was very much increased when
Colonel Berkeley’s back was turned, and in the privacy of the
kitchen, Petrarch—or more commonly Pete—pished and pshawed
and railed and swore in the colonel’s most inimitable manner. Each,
too, possessed a type of aggressive piety, which in Colonel Berkeley
took the form of a loud declaration that a gentleman, in order to be a
gentleman, must be a member of the Episcopal Church. This once
accomplished, the Colonel was willing to allow liberally for the
weaknesses of human nature, and considered too great strictness of
behavior as “deuced ungentlemanlike, begad.” Petrarch regarded
himself as a second Isaiah the prophet, and a vessel of election—
having reached the stage of perfectibility—a usual thing in the
experience of a genuine African. The Colonel described Petrarch as
“that infernal rascally boy of mine,” and this “boy” was the one
individual he had never been able to overawe or silence. Possibly an
exception might be made to this in Miss Olivia, who sitting up, slim
and straight and pretty, was treated by her father with elaborate old-
fashioned courtesy. Colonel Berkeley was in a particularly happy and
virtuous frame of mind on this day. This was his first appearance in
public since his return from Europe, where a serious bodily injury
had kept him during the whole four years of the war. He gloried in the
consciousness that he was no renegade, but had returned to the
sacred soil as soon as he possibly could, when he might have been
enjoying himself elsewhere. When the Colonel said “the State of
Virginia,” he really meant the whole planetary system. Nevertheless,
two weeks in his beloved Virginia had bored him dreadfully, and he
was “more orkarder,” as Petrarch expressed it, than any other two
weeks of his whole life. The Campdown races he hailed as a
godsend. He had a good competence left, in spite of having sent
orders to his agents to convert lands, stocks, bonds, and everything,
into Confederate securities—cotton bonds, Confederate gunboat
stock, anything in which the State of Virginia was bound up. As far
as in him lay, he had made ducks and drakes of a splendid fortune,
from the finest and most disinterested motives that ever inspired a
mistaken old gentleman, but fate had befriended him against his will.
An investment at the North that the colonel had vainly tried to throw
in the general wreck, had escaped confiscation, and had increased,
a hundredfold in value. His orders to sell half of Isleham, his family
place, for Confederate money, had arrived too late for his agent to
carry it out. He had done the handsome thing, as it was esteemed,
and after having practiced the strictest virtue, he was rewarded with
all the pleasures that are commonly supposed to be the reward of
vice.
“Don’t you think, papa,” the young girl said to him at once, “that
we should go up on the grand stand? It might look a little—a little
standoffish for us to remain here—and the county people—”
The Virginians inherit from their English ancestry, a vast and
preposterous respect for their county people—and Miss Olivia
Berkeley, fresh from Paris and London, was more anxious that no
fault should be found with her by these out-of-the-way provincials
than any of the fine people she had met during a considerable
transatlantic experience. So was Colonel Berkeley—but there was a
fly in his ointment.
“I would with pleasure, my love, but damme if those Hibbses are
not sitting up on the stand along with their betters—and I won’t rub
elbows with the Hibbses. It’s everywhere the same. Society is so
infernally mixed now that I am always expecting to meet my tailor at
dinner. I thought certainly, in old Virginia, the people would know how
to keep the canaille in their places, and there, by George, sits a
family like the Hibbses staring me in the face.”
“Yes,” replied Olivia, smiling. “It’s everywhere the same—you are
bound to meet some of the Hibbses everywhere in the world—so we
might as well do the right thing in spite of them. Petrarch, open the
carriage door.”
The Colonel, with old-fashioned gallantry, assisted his daughter
to alight, and giving her his arm, they crossed the track in full view of
the grand stand, and went up the rickety wooden stairs at the end.
At no period in her life had Olivia Berkeley felt herself so
thoroughly on exhibition as then. Her figure, her air—both of which
were singularly graceful and refined—her gown which was Paris-
made—all were minutely examined by hundreds of eyes that had not
seen her since, as a pretty, half-grown girl, she went to church and
paid visits under the charge of a demure governess. After they had
crossed the white track, they were greeted by numerous gentlemen
who sauntered back and forth about the quarter-stretch. Colonel
Berkeley was elaborately gracious, and Olivia was by nature affable
—to all except the Hibbses. But when they passed that inoffending
family, the Colonel stalked on pointedly oblivious, and Olivia’s slight
bow was not warming or cheering.
People moved up to shake hands with them—girls of Olivia’s
age, soft voiced, matronly women, elderly men, a little shaky and
broken, as all the old men looked after the war—and young men with
something of the camp hanging to them still. Olivia was all grace,
kindness, and tact. She had forgotten nobody.
Meanwhile Petrarch, who had followed them, managed to edge
up to her and whisper:
“Miss ’Livy, ain’t dat ar Marse French Pembroke an’ he b’rer
Miles? Look a-yander by de aige o’ de bench.”
Olivia glanced that way, and a slight wave of color swept over her
face—and at that moment “Marse French’s b’rer Miles” turned his full
face toward her.
He was a mere lad, of eighteen at the utmost. One side of his
face, as she had first seen his profile, was of the purest Greek
beauty. But on the other side, a shot had done dreadful work. One
eye was drawn out of place. A horrid gash in the cheek remained,
and one side of the mouth was painfully disfigured. On the same
side, an arm was missing.
A torrent of pity almost overwhelmed Olivia as she looked at the
boy—her little playmate in years gone by. And then the elder brother
caught her eye, and bowed and smiled. He did not possess the
beauty that had once belonged to Miles. He was dark and tanned,
and his features had a manly irregularity. But he stood up straight
and tall, and had the figure of a soldier. In a moment or two Olivia
was shaking hands with Miles, looking straight and boldly into his
face, as if there was nothing remarkable there. But just as she
touched French Pembroke’s hand, the blonde woman in the victoria
came within her line of vision.
Olivia threw up her head, and greeted Pembroke with a kind of
chilling sweetness. But this all dissolved toward Miles.
“How delightful to see you again,” she said. “I suppose I shall
have to say Mr. Miles now, although I never can think of you as
anything but a dear little tormenting boy.”
The ghost of a smile—his smile was a mere contortion—came
into Miles’ face—and while he talked, he thrust his one hand into his
trousers pocket with a gesture of boyish shyness. Olivia thought she
heard the tell-tale rattle of marbles in the pocket.
“I’ve—I’ve been a soldier since I saw you,” he said, with a boy’s
mixture of pride and diffidence.
“So I hear,” answered Olivia, with a pretty air of severity, “ran
away from school, I believe.”
“Yes,” said Miles, his diffidence disappearing before his pride. “I
was big enough to carry a musket. Though I wasn’t but sixteen, I
was taller than the captain of my company. Soldiering was fun until—
until—.” He began to blush furiously, but kept on after a moment. “I
didn’t mind sleeping in the mud, or anything. A man oughtn’t to mind
that sort of thing, Olivia—if you’ll let me call you Olivia.”
“Of course I will,” replied Olivia gayly. “Do you think I want to
appear any older than I am?” Then she turned to Pembroke and
said, “I was sorry not to have seen you the day you came to Isleham.
We met last in Paris.”
“I hope to see as much of Isleham as we did in the old days,”
answered Pembroke. His voice was rather remarkable, it was so
clear and well modulated.
“I hope,” began Miles, stammering a little, “that—that you and the
Colonel understood my not—why I didn’t come to see you in Paris.”
“Not fully,” answered Olivia, pleasantly. “You must come over to
Isleham and explain it—if you can. Have you seen papa yet?”
“I see him now,” said Pembroke with a smile, “shaking hands with
Mrs. Peyton.”
Olivia smiled too. There had been a flirtation between Mrs.
Peyton and Colonel Berkeley forty odd years before, and as
everything that happened in the community was perfectly well known
by everybody else, the episode had crystallized into a tradition.
Colonel Berkeley had been known to swear that Sally Peyton in her
youth was a jilt. Mrs. Peyton always said that Tom Berkeley was not
to be depended on. The Colonel was saying to Mrs. Peyton in his
grandest tones:
“Madam, Time has passed you by.”
“Ah, my dear Colonel,” responded Mrs. Peyton with a quizzical
look at Colonel Berkeley’s elaborate toilet and flamboyant shirt
ruffles, “we can’t cross the dead line of sixty without showing it. Even
art cannot conceal it.”
“Just like Sally Peyton’s sharp tongue,” the colonel growled sotto
voce—while a suppressed guffaw from Pete on the verge of the
group, showed the remark was not lost on that factotum.
“And Petrarch too,” cried Mrs. Peyton in her fine, jovial old voice,
holding out her hand.
Pete shuffled up and took her hand in his black paw.
“Howdy, Miss Sally. Lordy, marster done tole de truf—you looks
jes ez young an’ chipper—How’s Mandy?”
“Mandy has lost her senses since old Abe Lincoln made you all
free. She’s left me and gone to Richmond to go to school—the old
idiot.”
“Hi! I allers did like Mandy, but I ain’t got no use fer dem niggers
dat kin read ’n write. Readin’ an’ writin’ is fer white folks.”
“Shut up, you black rascal,” roared the Colonel, nevertheless
highly delighted. “Madam, may I present my daughter—Olivia, my
child.”
Olivia came up, and Mrs. Peyton kissed her affectionately, but not
before a rapid glance which took in all there was of her.
“Like her sainted mother,” began the Colonel, dramatically.
“Not a bit,” briskly answered Mrs. Peyton. “A Berkeley all over, if
ever I saw one. Child, I hope you are as nice as you are pretty.”
“Nobody ever told me I wasn’t nice,” responded Olivia with a
smile.
“And not spoiled by your foreign travels?”
“Not in the least.”
Clang! Clang! Clang! goes the saddling bell.
“What do you think?” says Olivia laughing. “Papa has entered
Dashaway. You know he is twelve years old, and as Petrarch says,
he hasn’t any wind left—but papa wouldn’t listen to anybody.”
“Yes, that’s Tom Berkeley all over. Ah, my dear, I could tell you
something that happened forty-two years ago, in which I promise
you, I got the better of your father.”
The horses by this time are coming out. They are an ordinary
looking lot except one spanking roan, the property of the despised
Hibbses, and Dashaway, a gray thoroughbred, a good deal like
Colonel Berkeley himself, but like him, with certain physical defects.
The gray has a terrific wheeze, and the hair on his fetlocks is
perfectly white. But he holds his head up gallantly, and gives a
tremendous snort which nearly shakes the mite of a darkey off his
back. All the jockeys are negro boys. There is no pool-selling, but the
gentlemen make bets among themselves and with the ladies. The
transactions if small, are exciting.
Colonel Berkeley’s presence hardly prevents a laugh as the gray
ambles past the grand stand, snorting and blowing like a porpoise.
The Colonel, however, has unshaken confidence in Dashaway. Is he
not of the best blood of Sir Henry, and didn’t he win fourteen hundred
dollars for the Colonel on the Campdown course the year before the
war? Colonel Berkeley knows a horse well enough—but to know
horses and to know one’s own horse are two things.
Colonel Berkeley, leaning over the fence, is giving his directions,
in a loud voice, to the little darkey, who is nearly ashy with fright. He
knows what is expected of him, and he knows Dashaway’s
deficiencies.
“Now, sir, you are to make the running from the half-mile post.
Keep well up with the horse in the lead, but don’t attempt to pass him
until you have turned the half-mile.”
“Yes, sah,” answers the small jockey, trembling. “But Dashaway,
he c’yarn run much, sah, ’thout blowin’, an’—an’—”
“Zounds, sirrah, do you mean to instruct me about my own
horse? Now listen you young imp. Use the whip moderately,
Dashaway comes of stock that won’t stand whip and spur. If he runs
away, just give him his head, and if you don’t remember every word I
tell you, by the Lord Harry, I’ll make you dance by the time you are
out of the saddle!”
“Good Gord A’mighty, marster,” puts in Petrarch. “Dashaway, he
ain’ never gwi’ run away. He too ole, an’ he ain’t strong ’nuff—”
“Good Gad, sir, was ever a man so tormented by such a set of
black rascals? Hold your tongue—don’t let me hear another word
from you, not another word, sir.”
The jockey, who takes the Colonel’s words at their full value,
which Petrarch discounts liberally, begins to stutter with fright.
“M—m—marster, ef I jes’ kin git Dashaway ’long wid de res’—”
“Silence, sir,” shouts the Colonel, “and remember every word I tell
you, or——” Colonel Berkeley’s appalling countenance and uplifted
cane complete the rest.
Dashaway is not only conspicuously the worst of the lot, but the
most troublesome. Half a dozen good starts might be made but for
Dashaway. At last the flag drops. “Go!” yells the starter, and the
horses are off. Dashaway takes his place promptly in the rear, and
daylight steadily widens between him and the last horse. As the field
comes thundering down the homestretch the spanking roan well in
the lead, Dashaway is at least a quarter of a mile behind, blowing
like a whale, and the jockey is whipping furiously, his arm flying
around like a windmill. The Colonel is fairly dancing with rage.
Colonel Berkeley is not the man to lose a race to the Hibbses
with composure, and Petrarch’s condolences, reminiscences,
prophecies and deductions were not of a consolatory character.
“Ole Marse, I done tole you, Dashaway warn’t fitten ter run, at de
very startment. He been a mighty good horse, but he c’yarn snuffle
de battle fum befo’, an’ say Hay! hay! like de horse in de Bible no
mo’.”
“Shut up, sir—shut up. Religion and horse racing don’t mix,” roars
the Colonel.
“Naw suh, dey doan! When de horse racin’ folks is burnin’ in de
lake full er brimstone an’ sulphur, de ’ligious folks will be rastlin’ wid
de golden harps—” Petrarch’s sermon is cut ruthlessly short by
Colonel Berkeley suddenly catching sight of the unfortunate jockey in
a vain attempt to get out of the way. But his day of reckoning had
come. Petrarch had collared him, and the Colonel proceeded to give
him what he called a dressing-down, liberally punctuated with
flourishes of a bamboo cane.
“Didn’t I tell you,” he was shouting to the unhappy youngster, “to
make the running—to make the running, hay?”
“M—m—marster, I ’clar to Gord, I thot’ Dashaway wuz gw’in’ to
drap ’fo I git him to de half-mile pos’—”
“Drap—you scoundrel, drap! The blood of Sir Henry drap! You
confounded rascal, you pulled that horse,” etc., etc., etc.
Mrs. Peyton laughed. “It does my heart good to hear Tom
Berkeley raging like that. It reminds me that we are not all dead or
changed, as it seems to me sometimes. Your father and I have had
passages-at-arms in my time, I can tell you, Olivia.”
Clang! presently again. It is the saddling bell once more. But
there is no Dashaway in this race. Nevertheless it is very exciting.
There are half a dozen horses, and after the start is made it looks to
be anybody’s race. Even as they come pounding down the straight
sweep of the last two furlongs, it would be hard to pick out the
probable winner. The people on the grand stand have gone wild—
they are shouting names, the men waving their hats, the women
standing up on benches to see as two or three horses gradually
draw away from the others, and a desperate struggle is promised
within the last thirty lengths. And just at this moment, when
everybody’s attention is fixed on the incoming horses, French
Pembroke has slipped across the track and is speaking to the blonde
woman in the victoria. His face does not look pleasant. He has
chosen this moment, when all attention is fixed on something else to
speak to her, so that it will not be observed—and although he adopts
the subterfuge, he despises it. Nor does the blonde woman fail to
see through it. She does not relish being spoken to on the sly as it
were. Nothing, however, disturbs the cheerful urbanity of the
gentleman by her side. He gets out of the carriage and grasps
Pembroke by the hand. He calls him “mon cher” a vulgar mode of
address which Pembroke resents with a curt “Good-morning, Mr.
Ahlberg,” and then he lifts his hat to the lady whom he calls Madame
Koller. “Why did you not come before?” she asks, “you might have
known it would be dull enough.”
“Don’t you know everybody here?”
“Oh, yes,” replied Madame Koller, sighing profoundly. “I
remember all of them—and most of the men have called. Some of
them are so strange. They stay all day when they come. And such
queer carriages.”
“And the costumes. The costumes!” adds Mr. Ahlberg on the
ground.
Pembroke felt a sense of helpless indignation. He answered Mr.
Ahlberg by turning his back, and completely ignoring that excessively
stylish person.
“You must remember the four years’ harrowing they have been
through,” he says to Madame Koller. “But they are so thoroughly
established in their own esteem,” he adds with a little malice, “that
they are indifferent even to the disapproval of Madame Koller. I am
glad to see you looking so well. I must, however, leave you now, as I
am one of the managers, and must look after the weighing.”

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ParentCo’s SubCo’s Taxable Consolidated

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ParentCo’s SubOne’s Taxable SubTwo’s Taxable Consolidated

ParentCo SubOne SubTwo

ParentCo’s SubOne’s Taxable SubTwo’s Taxable Consolidated

77. Which of the following items is not computed on a consolidated basis?

ParentCo’s ChildCo’s Taxable Consolidated

ParentCo’s ChildCo’s Taxable Consolidated

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ParentCo’s SubCo’s Taxable

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97. Deferring recognition of an intercompany gain is one ____________________ (advantage/disadvantage) of electing to

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∙ SubCoB, a U.S. manufacturer.

∙ SubCoC, a U.S. S corporation.

∙ SubCoD, a U.S. partnership.

∙ SubCoE, a U.S. limited liability company (LLC).

∙ SubCoF, a U.S. manufacturer incorporated in Puerto Rico.

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∙ SubCoH, a U.S. tax-exempt museum.

Parent SubOne SubTwo SubThree Consolidated

Parent SubOne SubTwo SubThree Consolidated

Separate Taxable Separate Tax Allocation Allocated

TopCo’s adjusted current earnings $2,000,000

a. Compute the ACE adjustment for the consolidated group.

When the ACE adjustment is computed on a consolidated basis, BottomCo’s “unused”

∙ TopCo’s separate ACE adjustment = $600,000 = .75 × ($2,000,000 – $1,200,000)

BottomCo’s separate ACE adjustment = ($375,000) = .75 × ($500,000 –

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Tax Year Holloway Corporation Olson Corporation

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Tax Year Whitman Corporation Draper Corporation

Parent’s SubOne’s SubTwo’s Consolidated

c. In this light, analyze the election to consolidate.

Parent’s SubOne’s SubTwo’s Consolidated

ANSWER: ParentCo’s separate taxable income amounts to $117,000.

Income from operations $100,000

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∙ preserve intangible assets such as trade names,

∙ accomplish estate planning objectives, and