Chapter 8:
Consolidated Tax Returns
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CONSOLIDATIONS
(1 of 2)
 Affiliated
groups
 Advantages & disadvantages of
consolidating
 Consolidated taxable income
 Consolidated regular tax liability
 Consolidated AMT liability
 Intercompany transactions
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CONSOLIDATIONS
(2 of 2)
 Consolidated
dividends
 Consolidated charitable contributions
 Consolidated NOLs
 Other consolidated items
 Stock basis adjustments
 Consolidated U.S. production
activities deduction
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Affiliated Groups
(1 of 3)
 Parent
must directly own 80% of
voting power & 80% of total value
of stock of at least one subsidiary
 Parent & other group members must
own 80% of the voting power &
80% of value of each corporation to
be included in the group
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Affiliated Groups
(2 of 3)
 Excluded
corporations
Tax
exempts under §501
Insurance companies
Foreign corporations
Corporations claiming §936 possessions
tax credit
Regulated investment companies
Real estate investment trusts
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Affiliated Groups
(3 of 3)
 Excluded
corporations (continued)
Domestic
international sales
corporations (DISC)
S corporations
 Partnerships
and LLCs who choose to
be taxed as corps (under check-thebox regs) may be part of an affiliated
group
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Advantages of Consolidating
 Losses
in one member offset gains in
another in the current year
 Intragroup dividends are eliminated
 Combined credit and deduction may
avoid carryovers
 Intragroup gains are deferred
 Consolidated AMT may reduce the
negative effects of AMT adjustments
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Disadvantages of
Consolidating
 Election
binding on subsequent years
 Members must use same tax year
 Intragroup losses are deferred
 Intragroup losses may prevent a
profitable member from taking credits
 Additional administrative cost
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Consolidated Taxable Income
(1 of 2)
1.
2.
Compute each member’s income
Adjust each member’s income

3.
Adjustments made to take into account
special consolidated treatment
Eliminate any item that is reported on
a consolidated basis

Resulting amount is separate taxable
income
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Consolidated Taxable Income
(2 of 2)
4.
Combine separate taxable income
(STI) of each member

5.
Resulting amount is combined TI
Adjust combined taxable income
for items reported on a
consolidated basis

Resulting amount is consolidated
taxable income (or NOL)
See Table C8-1
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Consolidated Regular Tax
Liability (1 of 2)
 Multiply
consolidated taxable income
by the appropriate tax rate(s) in §11
If
affiliated group chooses files separate
tax returns, reduced tax rates on lower
income apply only one time regardless
of number of members in group
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Consolidated Regular Tax
Liability (2 of 2)
 Affiliated
groups may claim all tax
credits available to corporations
Determined
on a consolidated basis
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Consolidated AMT Liability
 AMT
prepared on a consolidated
basis for all group members
 Computation parallels determination
of group’s consolidated taxable
income
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Intercompany Transactions
(1 of 2)
 Transactions
between corporations
that are members of the same
affiliated group immediately after the
transaction
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Intercompany Transactions
(2 of 2)
 Examples
include:
Transfers
of property
Performance of services
Licensing of technology
Renting of property
Lending of money
Payment of a dividend to a parent
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Transfers of Property
(1 of 2)
 Group
members recognize gain or
loss on intercompany property
transfers in computing separate
taxable income
 Intercompany gain or loss excluded
from consolidated income until a
later event triggers recognition.
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Transfers of Property
(2 of 2)
 Recognition
triggers:
Buyer
claims depreciation, amortization
or depletion on purchased asset
Amortization of capitalized services
Departure from the group by either
buyer or seller
Parent starts a separate return year
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Other Intercompany Transactions
 Both
parties report their side of the
transaction in determining separate
taxable income
 Net effect upon consolidation is zero
 If parties use different methods or tax
years, adjustments to match income
and expense are required
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Consolidated Dividends
 Dividends
received from other group
members are excluded from
consolidated income
 Dividends-received deduction
applied on a consolidated basis for
dividends from non-group member
corporations
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Consolidated Charitable
Contributions
 The
affiliated group’s charitable
contribution deduction is computed
on a consolidated basis
Sum
the individual contributions
10% limitation based on adjusted
consolidated taxable income
Same
as adjusted taxable income for a
corporation
Carryover
the excess for 5 years
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Consolidated U.S. Production
Activities Deduction (1 of 3)
 The
affiliated group’s U.S. production
activities deduction (CPAD) is
computed on a consolidated basis
Lesser
of
Consolidated
productive activities income
or
Consolidated taxable income before STCT
deduction
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Consolidated U.S. Production
Activities Deduction (2 of 3)
 For
purposes of computing CPAD,
definition of affiliated group stock
ownership threshold is 50% instead of
80%
Lower
threshold may require inclusion of
corps in this deduction that are not part
of the consolidated return.
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Consolidated U.S. Production
Activities Deduction (3 of 3)
 Production
activities income
computed on consolidated basis and
then deduction allocated to corps
based on relative amount of qualified
production activities income
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Consolidated NOLs
(1 of 2)
 Consolidating
income matches
income from one member with
losses from another, reducing
taxable income
 Carrybacks and carryforwards done
on consolidated basis if group has
not changed its members
Carryback
2 yrs and forward 20 years
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Consolidated NOLs
(2 of 2)
 Special
loss limitations may apply
Separate
return limitation year (SRLY)
§382 limitation (Loss group)
 See
Topic Review C8-2
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Separate Return Limitation Year
(SRLY) (1 of 3)
 Parent-sub
relationship exists
 Subsidiary has been filing separate
returns and has NOLs
 Upon joining group, the sub’s losses
can be used to offset future
consolidated income subject to
limitations
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Separate Return Limitation Year
(SRLY) (2 of 3)
NOL
allocable to departing member
becomes member’s separate CF only after
all available carryovers are absorbed in
current consolidated return year
NOL
CF incurred in SRLY lesser of
 Loss
member’s income, gain, deduction, and loss
minus NOLs previously absorbed for all
consolidated return years of group,
 Consolidated taxable income, or
 Amount of the NOL carryover
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Separate Return Limitation Year
(SRLY) (3 of 3)
SRLY
carryover cannot be used when
member’s cumulative contribution < $0
 SRLY
rules also apply to carrybacks for
corporations who leave group and later
carryback NOLs to consolidated years
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§382 Limitation
(1 of 2)
 §382
limitation applied when
unrelated corp (or group) added as a
subsidiary and has NOLs
 Limitation determines dollar amount
of loss carryforward from new sub
(or sub group) that can be applied to
reduce consolidated taxable income
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§382 Limitation
(2 of 2)
 Loss
limitation determined by
multiplying the value of the loss group
times the appropriate federal interest
rate
Loss
group value is value of all common
& pref stock owned by outsiders
immediately before change of ownership
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Consolidated Capital
Gains & Losses
 §1231
gains and losses and capital
gains and losses computed on a
consolidated basis
Eliminated
from STI
 SRLY
and §382 rules apply to capital
loss carrybacks and carryforwards
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Other Consolidated Items
 Adjusted
includes
combined taxable income
All
capital gains and losses on current
transactions with outsider
Net capital loss carryover or carrybacks
§1231 gains or losses
Casualty and theft gains or losses
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Stock Basis Adjustments
(1 of 2)
 Annually,
basis for investment in a
subsidiary corporation is adjusted
 Adjustment parallels the “equity”
method of accounting for
investments but uses tax numbers
instead of book income numbers
 Adjustments listed on page C8-34.
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Stock Basis Adjustments
(2 of 2)
 Large
negative basis adjustments can
reduce a sub’s stock basis to $0
Negative
basis adjustments when sub’s
basis is $0 creates an excess loss account
Subsequent positive adjustments reduce
(or eliminate) the excess loss account
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University of Northern Colorado’s
Kenneth W. Monfort College of Business
richard.newmark@PhDuh.com
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