T2-M3 Consolidated Tax Returns

Question 1

what are examples of entities denied the privilege of filing consolidated return?

Answer 1

FIRES
- Foreign corps
- Insurance companies (some)
- REITS
- Exempt organizations (most)
- S corps

Question 2

what is an affiliated group?

Answer 2

a common parent directly owns:
- 80% or more of the voting of all outstanding stock; and
- 80% or more of the value of all outstanding stock of each corporation
* for GAAP, 50% or more ownership is qualified for consolidated financial statements

• brother-sister corps: an individual (not a corp) owns 80% or more of the stock of 2 or more corps may NOT file consolidated returns

Question 3

what initial requirements must be met to file a consolidated return?

Answer 3

• all the corps in the group must be members of an affiliated group at some time during the year
• each member of the group file a consent form 1122 (authorization and consent of sub corp) and included in the consolidated return. Notes:
  + the act of filing a consolidated return by all the affiliated corps will satisfy the consent requirement
  + the election to consolidate must be made no later than the extended due date of the parent’s TR for the year

Question 4

what are the steps of calculate consolidated taxable income?

Answer 4

1. calculate each member’s TI
2. make adjustments to eliminate intercompany transactions
   - gains/losses that are deferred on intercompany sales between group members
   - inventory for intercompany sales
   - dividends received by one member from another member are excluded
3. remove the gains, losses, and deductions that should be determined at consolidated level
   - capital gains/losses
   - section 1231 gains/losses
   - NOL
   - charitable contribution deduction (10% of adjusted taxable income limitation)
   - DRD (less than 20% = 50% deduction; 20% - less than 80% = 65% deduction; 80% or more = 100% deduction)
4. calculate the group’s combined TI
5. apply adjustments for items determined at the consolidated level (items from step 3)

Question 5

what are tax accounting methods and periods?

Answer 5

• each member of the consolidated group must use the parent’s tax year
• certain threshold limitations applied on a consolidated basis to determine tax accounting method

Question 6

who is liable for taxes and estimated tax payments?

Answer 6

• each member is jointly and severally liable for the entire consolidated tax liability, penalties, and interest
• estimated tax payments must be made on a consolidated basis starting with the 3rd consolidated TR year. Prior 3rd year can be separate or consolidated

Question 7

what are advantages and disadvantages for filing consolidated returns?

Answer 7

• Advantages:
• capital losses of one corp offset capital gains another corp
• operating losses of one corp offset operating profits another corp
• dividends received are 100% eliminated
• certain tax deductions and credits may be better utilized when limitation of the consolidated level than separate corp
• a corp’s NOL carryover may be applied to the consolidated level
• income from intercompany sales are deferred
• Disadvantages:
• complex regulations
• double counting inventory can occur if having intercompany sales
• losses from certain intercompany transactions may be deferred
• each member must change its tax year to the same as parent
• tax credits may be limited by operating losses of other members
• the election to file consolidated returns is binding for future years and may be terminated by disbanding the group or seek permission from the IRS
• many states do not allow for filing consolidated returns, which may result in additional tax preparation time and expense when companies have to file consolidated federal returns and separate for these states