R4: M6: Consolidated tax returns.

☐ B and C paid dividends to A of $60,000 and $30,000, respectively. =90,000. ☐ B sold inventory to A and recorded a $50,000 intercompany profit, which needs to be excluded from B's gross receipts and deferred

[until the inventory is sold to an outside party]. ☐ C sold a piece of equipment to B and recorded a $10,000 Section 1231 gain on sale.

(8). Tax Compliance Requirements. Although supplementary attachments and schedules are required, consolidated tax returns

are filed using the same Form 1120 as single filing corporations and by checking the box on page 1 indicating that the 1120 is being filed on a consolidated basis.

Step 3: Remove the gains, losses, and deductions that should be determined at the consolidated level. ☐ C's charitable contributions deduction: During the year, C paid $40,000 in contributions but was limited to $30,500 at the stand-alone level [10 percent of C's taxable income

before the contributions deduction and other special deductions]. ☐ A's dividends-received deduction: $90,000 of dividends received from B and C at 100 percent deduction; $110,000 from 30 percent owned domestic company at 80 percent deduction.

☐ Each member of the group must change its tax year to the same year as the parent corporation. A corporation joining the consolidated group may have to file a short year tax return in addition to its inclusion in the consolidated filing in the same tax year when adopting the parent

corp.'s tax year. ☐ Many states do not allow for the filing of consolidated tax returns, thus companies discover that they file consolidated for federal income tax purposes but must file as a separate company for state income tax purposes resulting in additional tax preparation time and expense.

(1). overview of filing a consolidated return. filing a consolidated return is a privilege afforded to affiliated groups of corporations, and it can only be filed if all of the affiliated corporations consent to such a filing.

not all corporations are allowed the privilege of filing a consolidated return. Examples of those denied the privilege include S corporations, foreign corporations, most real estate investment trusts [REITs], some insurance companies, and most exempt organizations.

Rule: The dividends received deduction is increased to 100% of qualifying dividends received from a consolidated "parent-subsidiary affiliated group"

of a common parent who owns at least 80% of the total value and 80% of the total voting stock of the "other" includible corporations, if elected.

Rule: Filing a consolidated return is a privilege afforded to affiliated groups of corporations (Code Sections 1501 and 1504(b)), and it can only be filed if all of the affiliated corporations consent to such a filing. An affiliated group has ownership through a common parent. The common parent must directly

own at least 80% of the voting power of at least one of the affiliated (includible) corporations and at least 80% of the value of the stock of that corporation, and the other corporations not controlled by the parent must be controlled under the 80% ownership test by an includible corporation.

Not all corporations are allowed the privilege of filing a consolidated return. Example of those denied the privilege include S corporations, foreign corporations, most real estate investment trusts [REITs],

some insurance companies, brother-sister corporations in which an individual [not a corporation] owns 80 percent or more of the stock of two or more corporations, and most exempt organizations.

(9). Tax Accounting Methods and Periods. Members of the consolidated tax group are generally permitted to continue to use the same accounting methods that were in place prior to filing as a consolidated group. An exception is certain methods

which use threshold limitations applied on a consolidated basis, such as the determination of whether a corporation can use the cash method of accounting. Each member of the consolidated tax group must use the parent's tax year.

Eligibility to File Consolidated. (1). Olinto, an individual, owns 100 percent of both corporations A and B. There is no common ownership between corporations A and B. Corporations A and B would not qualify to file consolidated returns since neither corp. is 80 percent or more owned by another corp.

(2). Corp. A owns 100 percent of corp. B and C. Corp. B and C own 60 percent and 50 percent of Corp. D respectively. A, B, C, and D could file consolidated returns. Corp. A would be considered the common parent.

Step 5: apply adjustments for items determined at the consolidated level. (1). charitable contributions: at the consolidated level, the contributions limitation is now $95,700 [10 percent of taxable income of $957,000], so the group may take the full $40,000 contributions deduction.

(2). Dividends-received deduction: The DRD is now applied on the $110,000 of dividends from the 30 percent owned corporation [$110,000 x 80%=$88,000].

Rule: An affiliated group of corporation may elect to be taxed as a single unit, thereby eliminating intercompany gains and losses. To be entitled to file a consolidated return, all the corporations in the group (1). must have been members of an affiliated group at some time during the tax year and

(2). must have filed a consent [the act of filing a consolidated return qualifies as consent]. An affiliated group means that a common parent owns (2). 80 percent or more of the voting power of all outstanding stock and (2). 80 percent or more of the value of all outstanding stock of each corporation.

Filing a Consolidated Tax Return. (1). overview of filing a consolidated return. (2). initial requirements. (3). affiliated group defined = consolidated tax return. (4). Brother-sister Corporations.

(5). Advantages of Filing Consolidated Return. (6). Disadvantages of Filing Consolidated Return. (7). Consolidated Taxable Income Calculation. (8). Tax Compliance Requirements. (9). Tax Accounting Methods and Periods. (10). Liability for Taxes and Estimated Tax Payments.

(7). Consolidated Taxable Income Calculation. consolidated taxable income is determined using the following steps: (a). calculate the stand-alone taxable income of each member of the group, as if the member were filing its own separate tax return.

(b). adjustments are made to each member's taxable income to remove the effects of transactions between members of the consolidated group. These include adjustments for the following:

(2). initial requirements. to be entitled to file a consolidated return, all the corporations in the group must meet the following requirements: (a). be members of an affiliated group at some time during the tax year; and

(b). each member of the group must file a consent on Form 1122 [consent of subsidiary corp. to be included in a consolidated income tax return].

(b). each member of the group must file a consent on Form 1122 [consent of subsidiary corp. to be included in a consolidated income tax return]. (b.1). note that the act of filing a consolidated tax return by all the affiliated corporations will satisfy the consent requirement.

(b.2). the election to consolidate [which includes filing the consolidated tax return and attaching Form 1122] must be made no later than the extended due date of the parent corporation's tax return for the year.

(7). Consolidated Taxable Income Calculation. consolidated taxable income is determined using the following steps: (c). Gains, losses, ad deductions that are required to be determined at the consolidated level are removed from each member's taxable income. this includes the following:

(d). Each member's resulting taxable income from the previous steps is combined to create the group's combined taxable income. (e). the group's combined taxable income is then adjusted for the items that are required to be determined at the consolidated level.

Not all corporations are allowed the privilege of filing a consolidated return. Examples of those that are denied the privilege include:

1. S corporations, 2. Foreign corporations, 3. Most real estate investment trusts (REITs), 4. Some insurance companies, and 5. Most exempt organizations.

(4). Brother-sister Corporations.

Corporations in which an individual [not a corp.] owns 80 percent or more of the stock of two or more corporations may not file consolidated returns. Consolidate: GAAP = over 50%. Tax = 80%-100%

Step 4:

Calculate the group's combined taxable income.

(10). Liability for Taxes and Estimated Tax Payments. Each member is jointly and severally liable for the entire consolidated tax liability, tax penalties, and interest. estimated tax payments must be made on a consolidated basis starting with the third consolidated tax return year.

Prior to the third consolidated return year, estimated tax payments can be computed and paid on either a separate or a consolidated basis.

Calculation of Consolidated Taxable Income. A,B, and C corporations file a consolidated tax return for the year 2006. [B and C corp. are wholly owned subsidiaries of A corp.] Consolidated taxable income is determined as follows [see chart below]:

Step 1: Calculate each member's taxable income. Step 2: Make adjustments to eliminate intercompany transactions. During the year, the group had the following intercompany activity that requires adjustments:

(3). affiliated group defined = consolidated tax return. an affiliated group means that a common parent directly owns:

☐ 80 percent or more of the voting power of all outstanding stock; and ☐ 80 percent or more of the value of all outstanding stock of each corporation.

(b). adjustments are made to each member's taxable income to remove the effects of transactions between members of the consolidated group. These include adjustments for the following: ☐ inventory adjustments may be required for intercompany sales.

☐ Gains and losses that are deferred on intercompany sales between group members. in the year the asset is sold outside the group, a subsequent adjustment will need to be made. ☐ dividends received by one member from another member are excluded.

(5). Advantages of Filing Consolidated Return. ☐ certain tax deductions and tax credits may be better utilized when subject to the limitations of the overall consolidated group rather than individual members.

☐ a corporation's NOL carryover may be applied against the income of the consolidated group. ☐ income from certain intercompany sales may be deferred.

(6). Disadvantages of Filing Consolidated Return. the disadvantages of filing a consolidated return include: ☐ mandatory compliance with complex regulations.

☐ in the initial consolidated tax return year, a double counting of inventory can occur if group members had intercompany transactions. ☐ Losses from certain intercompany transactions may be deferred.

(c). Gains, losses, ad deductions that are required to be determined at the consolidated level are removed from each member's taxable income. this includes the following: ☐ Capital gains and losses. ☐ section 1231 gains and losses.

☐ net operating loss [NOL]. ☐ charitable contribution deduction. ☐ dividends-received deduction. ☐ domestic production deduction [section 199].

(5). Advantages of Filing Consolidated Return. among the advantages of filing a consolidated return are: ☐ capital losses of one corp. offset capital gains of another corp.

☐ operating losses of one corp. offset the operating profits of another corp. ☐ dividends received are 100 percent eliminated in consolidation because they are intercompany dividends.

(6). Disadvantages of Filing Consolidated Return. the disadvantages of filing a consolidated return include:

☐ the election to file consolidated returns is binding for future years and may only be terminated by disbanding the group or seeking permission of the internal revenue service. ☐ Tax credits may be limited by operating losses of other members.