SOLUTIONS MANUAL and TEST BANK 2013 Corporations Partnerships Trusts. 

Solutions Manual Test Bank   --   $35  Buy Now


Click here download the sample chapter.

* Contact us if you need help.

_________________________________________________________________________


Contents:
* Test Bank
* Solutions Manual (Complete)
* Solution Transparency Masters
* Practice Set Solutions
* Instructor's Guide
* Research Problem Solutions
* Solutions to Appendix E

Contents of Appendix E

Chapter 2
Problem 1 – Pet Kingdom – Form 1120 Corporate Tax Return E-1
Problem 2 – By the Numbers – Form 1120 Corporate Tax Return E-15
Chapter 9
Problem 1 – Fleming Products – Form 1118 E-23
Problem 2 – Cotton Export, Inc. – Form 1118 E-26
Chapter 10
Problem 1 – Rock the Ages – Form 1065 tax return E-28
Problem 2 – Branto, LLC – Form 1065 return E-38
Chapter 12
Problem 1 – Chocolat, Inc – Form 1120S E-55
Problem 2 – Textiles, Inc. – Form 1120S E-62
Chapter 18
Problem 1 – Daniel and Lisa Ward – Form 709 tax returns E-72
Problem 2 – Rachel Keating – Form 709 tax return E-81
Problem 3 – Pam Butler – Form 706 Tax Return E-85
Chapter 20
Problem 1 – Blue Trust – Form 1041 tax return E-99
Problem 2 – Green – Form 1041 tax return E-103


CHAPTER 8 Consolidated Tax Returns

1. LO.1 You are making a presentation to the board of directors of HugeCo about the merits of acquiring Bitty, Ltd., an important supplier. One board member knowing that you are a tax specialist, asks you to list some of the nontax reasons to make the acquisition. List at least four such motivations in a PowerPoint slide.

2. LO.1 Describe how a corporate entity might be restructured to enable the resulting group to qualify for a consolidation election. (Hint: Recall the corporate changes discussed in Chapter 7, such as the “Type A” reorganization.)

3. LO.2 Only a few sections in the Internal Revenue Code are devoted to the rules that control how consolidated income tax returns are filed. In contrast, the Regulations that explain and clarify those Code sections are voluminous. Given the complexity of the entities and transactions that consolidated returns involve, comment on whether this is a proper balancing of the tax-writing responsibilities in this area.

4. LO.2 Financial accounting rules do not always match the tax treatment of transactions involving groups of U.S. corporations. List at least two areas where tax and accounting rules differ when groups of affiliated corporations are involved.

5. LO.3 The local CPA Society is presenting its annual tax conference. Most of the attendees will be career tax professionals who work with smaller clients. You have been asked to submit an outline for your talk, “When to Use a Consolidated Tax Return: Federal Tax Law Issues.” Organize an outline that lists the advantages and disadvantages of a consolidation election. Include at least five points in each category. Keep your points at the introductory level, as most of the members of your audience know the rest of the tax law well but do not work regularly in this area.

6. LO.3, 4, 5 List the structural and compliance requirements under Federal income tax law that must be met before a parent and its affiliates are allowed to file on a consolidated basis. Consider only the requirements for the group to file its first consolidated return.

7. LO.3, 10 Black, Brown, and Red Corporations are considering a corporate restructuring that would allow them to file Federal income tax returns on a consolidated basis. Black holds significant NOL carryforwards from several years ago. Brown always has been profitable and is projected to remain so. Red has been successful, but its product cycles are mature and operating losses are likely to begin three years from now and last for a decade. What tax issues should the corporations consider before electing to file on a consolidated basis?

8. LO.3, 10 Continue with the facts presented in Question 7. In addition, assume that Brown Corporation has a history of making large, continuous charitable contributions in its community. In the next three years, Brown’s largest investment assets will be priced such that they will be attractive candidates for sale. Modify your list of tax issues to include these considerations.

9. LO.3, 9 Indicate whether each of the following would make good consolidated return partners in computing the affiliated group’s Federal income tax.

a. SubCo has a number of appreciated assets that it wants to sell to its parent, Huge Corporation.

b. SubCo has a number of assets that it wants to sell to its parent, Huge. The assets have declined in market value since SubCo purchased them.

c. ParentCo uses cost depletion in accounting for its natural resources, while SubCo wants to continue to claim percentage depletion.

d. ParentCo uses a calendar tax year, while SubTwo has been using a September 30 tax year-end.

10. LO.3, 5 Indicate whether each of the following would make good partners for electing to file a consolidated return for Federal income tax purposes. Explain why or why not.

a. SubCo cannot claim its full domestic production activities deduction because of the taxable income limitation. ParentCo is highly profitable every tax year.

b. ParentCo would like to file on a consolidated basis with SubOne because the subsidiary will be generating sizable operating losses in the next two tax years. Starting with the third tax year, though, SubOne will enter a highly profitable period.

c. ParentCo has $2 million in suspended foreign tax credits that will expire in two more tax years. Its wholly owned subsidiary, ShortCo, generates $5 million in foreignsource income every year.

d. This year, ParentCo generated $4 million in taxable income, and its wholly owned subsidiary, Small Corporation, reported a $3 million operating loss. Next year, though, Small is projected to start a four-year period with $20 million total taxable profits.

e. ParentCo is highly profitable and makes a large annual gift in support of the local tax-exempt zoological gardens. SubCo reports sizable operating losses every year.

11. LO.4 Provide the information required to complete the following chart. Group of Entities Eligible to Join a Consolidated Group? Why or Why Not Eligible?

a. Lima City Choral Artists ___________ ___________

b. Columbus United Health Insurance, Ltd. ___________ ___________

c. Bethke Services, Inc. ___________ ___________

d. Tequila Teléfono, organized in El Salvador ___________ ___________

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

f. Capital Management Partnership ___________ ___________ g. Henry Pontiac Trust ___________ ___________

12. LO.5 The Pelican Group cannot decide whether to start to file on a consolidated basis for Federal income tax purposes, effective for its tax year beginning January 1, 2013. Its computational study of the effects of consolidation is taking longer than expected. What is the latest date by which the group must make this critical decision?

13. LO.5 The Penguin Group cannot decide whether to cease to file on a consolidated basis for Federal income tax purposes, effective for its tax year beginning January 1, 2013. Its computational study of the effects of such a “de-consolidation” is taking longer than expected. What is the latest date by which the group must make this critical decision?

14. LO.5 Lavender and Azure began to file a calendar year consolidated return for tax year 2010. The group never extends the due date of its tax returns. Lavender acquires all of the stock of Rose on January 1, 2011, and immediately joins the consolidated group. All of the Rose stock is sold to another investor at the end of 2013. Explain the significance of the following dates. Which of your answers can change if the taxpayers so elect?

a. March 15, 2011. b. January 1, 2012. c. March 15, 2012. d. January 1, 2019.

15. LO.5 The consolidated tax liability for most affiliated groups is assigned among the parent and its subsidiaries—each entity is responsible for “its share” of the tax. The Regulations allow several methods to be used to compute these allocations. Identify and describe the two most commonly used tax allocation methods.

16. LO.5 Huge Corporation and its wholly owned subsidiary, Whit Corporation, file Federal tax returns on a separate basis. Huge manufactures postage meters, and Whit provides mail-order services to a cross section of clients in the state. Huge uses a calendar tax year, while Whit files using an April 30 year-end. Huge’s gross receipts for the year total $15 million, and Whit’s are $3.5 million. Identify some Federal income tax issues as to accounting periods and methods that the group would face if the corporations elected to consolidate.

17. LO.6 Your firm has assigned you to work with Jeri Byers, the tax director of a small group of corporations. The group qualifies to file on a consolidated basis and plans to make its first election to file in that manner. In a memo for Jeri’s tax file, describe some of the more important adjustments she will need to make to keep track of the parent corporation’s basis in the stock of each of the subsidiaries.

18. LO.6 An excess loss account is used by a parent in computing its basis in the stock it holds in a subsidiary so that the stock basis never can be less than zero. Explain.

19. LO.6 Your client, MegaCorp, has asked for your assistance in filing the current-year consolidated Federal income tax return. MegaCorp provides you with the following items for the parent and each of the affiliates. Comment.

• Gross income items.

• Deductions and credit amounts.

• Beginning and ending balance in E & P.

• Cash distributions from the subsidiaries to the parent, MegaCorp.

20. LO.6 Outline the process by which a consolidated group computes its Federal taxable income. Your description should match the approach taken in Figure 8.1. 21. LO.7 Parent Corporation and its wholly owned subsidiary, Child Corporation, have

filed Federal income tax returns on a consolidated basis since Child was incorporated many years ago. Both entities use calendar tax years. Parent uses accrual tax accounting, but Child uses the cash method. In December 2012, Parent renders services worth $750,000 to Child. Parent’s operations for 2012 result in a $2 million loss from all other sources. Parent sends Child an invoice for the services in December 2012, and Child pays it in January 2013. What tax consequences are the parties trying to accomplish? Will this plan work? Why or why not?

  22. LO.7 In December 2012, Child Corporation prepays Parent Corporation $750,000 for its 2013 use of a common database system. Child is a wholly owned subsidiary of Parent, with whom Child has filed a consolidated Federal income tax return since Child was spun off from Parent many years ago. While both entities have calendar tax years, Parent uses the accrual method; Child employs the cash method of tax accounting. Both entities are profitable for the 2012 tax year. What tax consequences are the parties trying to accomplish? Will this plan work? Why or why not?

23. LO.8 Tiny Corporation brought a $4 million NOL carryforward into the Mucho Group of corporations that elected to file on a consolidated basis as of the beginning of this year. Combined results for the year generated $15 million taxable income, $1.5 million of which was attributable to Tiny’s activities for the year. Has Tiny been a good consolidation partner? Explain.

24. LO.8 Parent and Child Corporations have filed on a consolidated basis since the mid- 1970s. Junior Corporation was formed at the beginning of this year through an asset split-off from Parent. Operations this year resulted in a $2 million operating loss, onefourth of which can be traced to Junior. Should Junior join the consolidated group this year? Will the group be able to carry back and claim a refund for the $500,000 NOL that is attributable to Junior? Explain.

25. LO.8 Put owned all of the stock of Call when the two corporations were formed a decade ago. The group immediately elected to file on a consolidated basis. Now Call’s management team has purchased the company from the parent and intends to carry on and expand the business into new markets. When Call left the Put consolidated group, the group held a $5 million NOL carryforward, $2 million of which was attributable to Call’s operations under formulas used by all of the parties. Call will generate $700,000 on each of its first five years’ worth of separate returns. Advise Call as to who “owns” the carryforwards after the corporate division.

26. LO.8 The consolidated return Regulations employ the “SRLY” rules to limit the losses a parent can claim with respect to a newly acquired subsidiary. Explain the tax policy behind the SRLY rules. Describe how they affect the timing of loss deductions after an acquisition.

27. LO.9 The computational method of Figure 8.1 indicates that consolidated taxable income includes a number of group items where limitations are applied on an aggregate basis. In no more than two PowerPoint slides, list as many group items as you can.

28. LO.9, 10 Intercompany transactions of a consolidated group can be subject to a “matching rule" and an “acceleration rule.”

a. Define both terms. b. As a tax planner structuring an intercompany transaction, when would it be beneficial to use either rule?

29. LO.9 Use a timeline to diagram the gain/loss recognition by this affiliated group.

• Year 1: SubCo purchases a nondepreciable asset for $400.

• Year 3: SubCo sells the asset to Parent for $575.

• Year 4: Parent sells the asset to Stranger (not an affiliate) for $660.

30. LO.9 Use a timeline to diagram the gain/loss recognition by this affiliated group.

• Year 1: SubCo purchases an asset for $400.

• Year 3: SubCo sells the asset to Parent for $300.

• Year 4: Parent sells the asset to Stranger (not an affiliate) for $140.

31. LO.9, 10 Junior was a member of the Rice consolidated group for many years. It left the group effective for the 2012 tax year. In 2010, Junior sold a plot of land to Parent at a $600,000 realized loss. Recognition of that loss by the group was deferred under the matching rule. As a departing group member, does Junior have any right to take the loss with it to be used on its subsequent separate returns? Prepare two memos for the tax research file, outlining the arguments both in Junior’s favor and in the remaining group’s favor.

32. LO.10 At a meeting of local tax executives last week, you heard several of the tax professionals complaining about the sizable costs that they incur in meeting and maintaining an election to file Federal consolidated income tax returns. Examine these comments in more detail. Under what circumstances might a group of affiliates decide not to make a consolidation election? List three or more reasons that might make a corporate group question whether it should make such an election.

33. LO.10 Findlay Corporation was formed by three engineers. Sally brings entrepreneurial skills to the ownership group, while Patricia is the “idea person.” Lois makes prototypes and works with potential manufacturers of Findlay products. Unfortunately, Findlay cannot exploit its operations due to lack of capital. Huge Corporation has the needed capital and recognizes Findlay’s potential. It has sent takeover overtures to the Findlay board of directors. As the chief of Findlay’s tax matters, you have been asked to prepare a list of items that will be necessary should the acquisition by Huge occur. Present your list of at least three items in a PowerPoint slide. P R O B L E M S

34. LO.2 Your client, Big Corporation, and its wholly owned subsidiary, LittleCo, file a consolidated return for Federal income tax purposes. Indicate both the financial accounting and the tax treatment of the following transactions.

a. LittleCo pays a $1 million dividend to Big. b. LittleCo sells investment land to Big. LittleCo’s basis in the land is $200,000. The sale price is $500,000. c. Six months after purchasing the land from LittleCo, Big sells the investment land to Phillips, an unrelated party, for $650,000.

35. LO.3 Giant Corporation owns all of the stock of PebbleCo, so they constitute a Federal affiliated group and a parent-subsidiary controlled group. By completing the following chart, delineate for Giant’s tax department some of the effects of an election to file Federal consolidated income tax returns. Situation If the Group Files a Consolidated Return If Separate Income Tax Returns Continue to Be Filed

a. PebbleCo pays a $1 million cash dividend to Giant. ___________ ___________ b. Taxable income for both group members this year is $50,000. ___________ ___________ c. Giant’s tax liability is $95,000, and Pebble’s liability totals $75,000. ___________ ___________ d. Giant uses the LIFO method for its inventories, but Pebble wants to use FIFO for its own inventories. ___________ ___________

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

If the Group Files a Consolidated Return If Separate Income Tax Returns Continue to Be Filed

a. Both Giant and PebbleCo produce taxable profits from manufacturing activities. ___________ ___________ b. PebbleCo pays Giant an annual royalty for use of the Giant trademarks. ___________ ___________ c. Giant uses a calendar tax year, while PebbleCo’s tax year-end is March 31. ___________ ___________ d. Giant claims a credit for its foreign tax payments, while Pebble claims a deduction for them. ___________ ___________

37. LO.3, 4 Apply the controlled and affiliated group rules to determine whether a parent-subsidiary controlled group or an affiliated group exists in each of the following independent situations. Circle Y for yes and N for no. Situation Parent-Subsidiary Controlled Group? Affiliated Group?

a. Throughout the year, Parent owns 65% of the stock of SubCo. Y N Y N b. Parent owns 70% of SubCo. The other 30% of SubCo stock is owned by Senior, a wholly owned subsidiary of Parent. Y N Y N c. For 11 months, Parent owns 75% of the stock of SubCo. For the last month of the tax year, Parent owns 100% of the SubCo stock. Y N Y N

38. LO.5 Grand Corporation owns all of the stock of Junior, Ltd., a corporation that has been declared bankrupt and has no net assets. Junior still owes $1 million to Wholesale, Inc., one of its suppliers, and $3.5 million to the IRS for unpaid Federal income taxes. Grand and Junior always have filed Federal income tax returns on a consolidated basis. What is Grand’s exposure concerning Junior’s outstanding income tax liabilities?

39. LO.5 Parent and Sub Corporations file their Federal income tax returns on a consolidated basis. Parent, a calendar year taxpayer, owns all of the outstanding stock of Sub. The consolidation election was effective in January 2011. Both companies are profitable, and tax projections for the future appear below. How much must be remitted to the IRS for estimated payments in each year?

Tax Year Parent’s Federal Tax Estimate Sub’s Federal Tax Estimate

2011 $500,000 $150,000 2012 500,000 170,000 2013 600,000 200,000 2014 750,000 300,000

40. LO.5 The Parent consolidated group reports the following results for the tax year. Dollar amounts are listed in millions. 8-38 PART 2 Corporations     Parent SubOne SubTwo SubThree Consolidated Ordinary income $700 $200 $140 ($90) $ 950 Capital gain/loss –0– –0– 60 (25) 35 § 1231 gain/loss 150 –0– (50) –0– 100 Separate taxable incomes $850 $200 $150 ($90) with a $25 capital loss carryover Consolidated taxable income $1,085 Consolidated tax liability $ 380 Energy tax credit, from SubOne (20) Net tax due $ 360 Determine each member’s share of the consolidated tax liability. All of the members have consented to use the relative taxable income method. Assume a 35% marginal tax rate.

41. LO.5 Assume the same facts as in Problem 40 except that the group members have adopted the relative tax liability tax-sharing method.

42. LO.5 ParentCo owns all of the stock of DaughterCo, and the group files its Federal income tax returns on a consolidated basis. Both taxpayers are subject to the AMT this year due to active operations in oil and gas development. No intercompany transactions were incurred this year. If the affiliates filed separate returns, they would report the following amounts.

Company Adjusted Current Earnings (ACE) AMT Income before the ACE Adjustment

ParentCo $1,600,000 $1,000,000 DaughterCo 250,000 300,000 Totals $1,850,000 $1,300,000 How does the consolidation election affect the overall AMT liability of the group?

43. LO.6 Senior, Ltd., acquires all of the stock of JuniorCo for $30 million at the beginning of 2011. The group immediately elects to file income tax returns on a consolidated basis. Senior’s operations generate a $50 million profit every year. In 2012, JuniorCo pays its parent a $9 million dividend. Operating results for JuniorCo are as follows. 2011 $ 4 million 2012 12 million 2013 15 million

a. Compute Senior’s basis in the JuniorCo stock as of the end of 2011, 2012, and 2013. b. Same as (a), except that JuniorCo’s 2012 tax year produced a $6 million NOL. c. Same as (a), except that JuniorCo’s 2012 tax year produced a $40 million NOL.

44. LO.6 WhaleCo acquired all of the common stock of MinnowCo early in year 1 for $900,000, and MinnowCo immediately elected to join WhaleCo’s consolidated Federal income tax return. As part of the takeover, WhaleCo also acquired $300,000 of MinnowCo bonds. The results of MinnowCo for the first few years of the group operations were reported as follows.

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

45. LO.6 Continue with the facts of Problem 44. WhaleCo has determined that it will sell all of its MinnowCo stock at the end of year 3 for $250,000. Taking into account the rules regarding excess loss accounts, determine WhaleCo’s gain/loss from its sale of the MinnowCo stock.

46. LO.7 Compute consolidated taxable income for the calendar year Blue Group, which elected consolidated status immediately upon creation of the two member corporations in January 2011. All recognized income relates to the consulting services of the firms. No intercompany transactions were completed during the indicated years. Year Blue Corporation Orange Corporation 2011 $250,000 ($ 50,000) 2012 250,000 (60,000) 2013 250,000 (240,000) 2014 250,000 90,000

47. LO.7, 8 Determine consolidated taxable income for the calendar year Yeti Group, which elected consolidated status immediately upon the creation of the two member corporations on January 1, 2011. All recognized income is ordinary in nature, and no intercompany transactions were completed during the indicated years.

Year Yeti Corporation Snowman Corporation

2011 $450,000 $ 70,000 2012 450,000 (310,000) 2013 450,000 (600,000) 2014 450,000 75,000

48. LO.8 Cougar, Jaguar, and Ocelot Corporations have filed on a consolidated, calendar year basis for many years. At the beginning of the 2012 tax year, the group elects to deconsolidate. The group’s $6 million NOL carryforward can be traced in the following manner: one-half to Cougar’s operations and one-quarter each to Jaguar’s and Ocelot’s. How will Ocelot treat the NOL on its 2012 separate tax return?

49. LO.8 The Giant consolidated group includes SubTwo, which was acquired as part of a § 382 ownership change. SubTwo brought with it to the group a large NOL carryforward, $3 million of which is available this year under the SRLY rules due to SubTwo’s positive contribution to the group’s taxable income. The § 382 limitation with respect to SubTwo is $500,000. How much of SubTwo’s NOL can be used this year to reduce consolidated taxable income?

50. LO.8 Child Corporation joined the Thrust consolidated group in 2011. At the time it joined the group, Child held a $2 million NOL carryforward. On a consolidated basis, the members of Thrust generated significant profits for many years. Child’s operating results during the first few consolidated return years were as follows. The § 382 rules do not apply to the group.

2011 ($ 100,000) 2012 1,600,000 2013 1,800,000

How will Child’s NOLs affect consolidated taxable income for each of these years? Is any refund available with respect to the NOL that Child brought into the group? Explain.

51. LO.9 B.I.G. Corporation sold a plot of undeveloped land to SubCo this year for $100,000. B.I.G. had acquired the land several years ago for $40,000. The consolidated return also reflects the operating results of the parties: B.I.G. generated $130,000 income from operations, and SubCo produced a $20,000 operating loss.

a. Use the computational worksheet of Figure 8.2 to derive the group members’ separate taxable incomes and the group’s consolidated taxable income.

b. Same as (a), except that SubCo sold the land to Outsider Corporation for $130,000 in a subsequent year, when its operating income totaled $20,000 (exclusive of the sale of the land), and Parent’s operating income amounted to $90,000. R E S E A R C H P R O B L E M S

Research Problem 1. Alpha and Beta have been members of an electing Federal consolidated group since the beginning of year 1. Also at the beginning of year 1, Alpha acquired and placed in service a fleet of trucks to be used in its business. The acquisition price was $1 million. Alpha used the 5-year MACRS tables to compute cost recovery deductions for the fleet; the depreciation percentages from the 5-year, mid-year convention MACRS table are listed below. Alpha did not claim any bonus depreciation for the fleet.

Year Depreciation Rate (%)

1 20 2 32 3 19.2 4 11.52 5 11.52 6 5.26

At the beginning of year 3, Alpha sold the fleet in full to Beta for $900,000. Alpha’s basis in the fleet on the date of the sale was $480,000; its realized gain on the sale totaled $420,000. Provide the following information.

a. The recognized gain of the consolidated group in year 3 from the sale. b. The consolidated group’s cost recovery deduction for the fleet in years 3 and 4.

Research Problem 2. LargeCo owns stock in Small Corporation. The voting shares and value of the Small stock owned by LargeCo are as follows.

• Common stock, 100%.

• Preferred stock, 60%. Under Small’s corporate bylaws, the board of directors manages all of the entity’s operations and investments. A majority vote of the board is required before any new policy or practice is adopted. Board members are elected in the following manner: the common shareholders elect five of the eight board members, and the preferred shareholders separately elect the other three directors. LargeCo would like to file a consolidated tax return with Small. Is the § 1504 stock ownership test met (i.e., does LargeCo own 80% of the voting power and value of the Small stock)? Prepare a memo for your firm’s tax research file that addresses this affiliated group issue.

Research Problem 3. The Cardinal Group had filed on a consolidated basis for several years. Parent Cardinal, Ltd., had a wholly owned subsidiary, Swallow, Inc. The group used a calendar tax year.

On January 25, 2012, Heron acquired all of the stock of Cardinal, including its ownership in Swallow, an important supplier for Heron’s manufacturing process. All parties in the new group intended to file on a consolidated basis immediately and, indeed, used consolidated amounts in filing the 2012 Heron Group return on September 10, 2013. During the audit of Heron Group’s 2012 tax return, the IRS disallowed the use of the consolidated method because no Forms 1122 had ever been filed for the affiliates in the new group. In a memo for the tax research file, summarize the possibilities for the Heron Group to be granted an extension to elect consolidated return status.

Research Problem 4. Last year Cutlinger, Inc., acquired Donte Corporation in a state-law merger. Donte immediately joined the Cutlinger consolidated return group for state and Federal income tax purposes. Both parties use the calendar tax year. At the time of the acquisition, Donte held some undeveloped land about 35 miles out of town known as Whispering Aspens, that it had purchased for speculation three years earlier. Donte’s basis in the land was $40 million, and a recent appraisal put its value on the date of the acquisition at $4 million.

The decline in the value of Whispering Aspens reflected the generally poor operating results that Donte had been experiencing. Exclusive of the sale of the land, Donte had generated a $2 million operating loss for the two years prior to being acquired by Cutlinger, and it projected the same results for the next two years as well, now as a Cutlinger subsidiary.

The Donte board of directors had wanted to sell off Whispering Aspens for $4 million before Cutlinger made the acquisition, but Cutlinger sweetened the per-share acquisition price and convinced them to wait. Cutlinger had learned from an inside source that the tollway authority that operated a road abutting Whispering Aspens had decided to build a new interchange nearby and that Whispering Aspens now would be much more valuable in an outright sale to developers. After the takeover, Cutlinger quickly sold off Whispering Aspens to a strip mall developer for $24 million in cash. On its consolidated tax return, the Cutlinger group reported a $16 million loss. On audit, the IRS disallowed the entire loss deduction. Mary Ellen Rogers, tax director of Cutlinger, wants your analysis of the tax results of the land sale. Write a letter to her addressing the IRS’s position. Cutlinger’s corporate offices are at 1101 Office Strip Lane, Suite 3, Hudson, OH 44237.

Research Problem 5. Graeter Corporation acquired all of the stock of Lesser Corporation in 2009, and the entities have filed a state and Federal consolidated income tax return ever since. In 2012, an audit notice from the state unemployment tax administration makes it clear that Lesser underpaid its 2010 state and Federal payroll taxes by $2 million. Lesser’s cash flow at this time is poor, and it has insufficient funds to pay the delinquent amount plus interest and penalties. Can the state revenue agency collect the outstanding payroll tax from Graeter under the Federal “joint and several liability” rule for tax obligations of consolidated return affiliates? Explain.

Research Problem 6. Find a thread in a tax blog involving consolidated returns. Post an entry to the site concerning acceptable tax allocation formulas. Which tax-sharing methods have been most popular with the blogger’s clients? Why? Have specific tax-sharing methods become more or less popular over time? What difficulties are encountered in gaining the affiliates’ consent to a tax-sharing method? Has the blogger created any new and unique variations on the most common tax-sharing methods? If so, how and why did these new formulas come about? Write an e-mail to your professor summarizing the following.

a. The text of your posted message. b. The most pertinent responses that you received in the first week after posting. c. The professional titles of other posters to the group and the other questions that they are discussing.

Research Problem 7. Determine whether the income tax laws of your state, and those of two of its neighbors, allow Federal affiliated groups to use capital loss, passive loss, and NOL deductions. What are the NOL carryback and carryforward periods? What other limitations apply? Communications Communications 8-42 PART 2 Corporations Internet Activity Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities. © Alex Slobodkin, iStockphoto    

Research Problem 8. Find several journal articles and Web postings addressing the consolidation election. Construct a list titled “Consolidated Returns: Compliance Tips and Traps.” Submit this document to your instructor. Provide citations for your research.

Research Problem 9. Identify the key details of the evolution and development of the Federal consolidated tax return rules. When were consolidated returns elective? When did they become required? What political forces were at work when the major 1966 and 1995 changes to the pertinent Federal income tax Regulations were adopted? When were NOL deduction limitations tightened or relaxed? Why? Arrange your findings using a timeline and no more than three PowerPoint slides.

Research Problem 10. Complete a review of the evolution of your state’s tax laws concerning consolidated returns. Use a format similar to the one described in Research Problem 9.