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Unformatted text preview: 8-1Chapter 8 Consolidated Tax Returns (2011) updated: June 2, 2011 Learning Objectives: •Explain the advantages and disadvantages of filing a consolidated tax return. •Determine whether a group of corporations is an affiliated group. •Calculate consolidated taxable income for an affiliated group. •Explain how to report/account for intercompany transactions of a consolidate group. •Explain how to compute deductions & credits (group items) on a consolidated basis. •Compute a parent’s stock basis in a subsidiary. I. Consolidated Tax Returns – In General A. Context of the consolidated tax return rules – approximately 90% of the 5.5 million corporate income returns filed in the U.S. are for closely-held businesses, but the vast majority of corporate income and assets are held by no more than 50,000 large entities that are eligible to file on a consolidated basis. B. Overall objective – organizational neutrality – a group of closely related corporations should have neither a tax advantage nor tax disadvantage relative to taxpayers who file separate tax returns C. Source of authority regarding consolidate tax returns – primarily the Treasury Regulations which have the force& effectof law (some of the longest & most complex rules in tax) D. Advantages 1. current losses can offset income of other members and reduce current regular tax or AMT (alternative minimum tax) 2. operating and capital loss carryovers of one member may be used to offset income of other members 3. intercompany dividends are eliminated 4. income on certain intercompany transactions can be deferred 5. certain deductions and tax credits can be better utilized when subject to limitations of overall group rather than individual members (may avoid carryovers) 6. basis in stock owned in lower tier entities is increased as income is reported (on subsequent sale – gain is reduced or loss is increased) 8-2E. Disadvantages 1. election is binding on all members for current and all subsequent years’ returns (all eligible subs MUST be included in the election) 2. members must use the same tax year (may initially require short tax year) 3. election may be terminated if membership in group changes and new member is not included in election 4. losses on intercompany transactions are deferred 5. certain deductions and tax credits may be reduced if limitations are determined based on activities of entire group 6. basis in stock owned in lower tier entities is reduced if losses from the subsidiary are reported 7. additional reporting requirements exist & additional administrative procedures are necessary (along with the increased compliance costs) 8. rights of minority shareholders must be respected – legally & ethically II. The Consolidated Tax Return (for an Affiliated Group) A.A corporation can electto join in a consolidated return if: 1. it is a member of an affiliated group(stock ownership test) 2. it is not ineligibleto file on a consolidated basis 3. it meets the initial and ongoing filing requirements (Code and Regs.) 3....
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This note was uploaded on 09/09/2011 for the course TAX 5015 taught by Professor Kelliher,c during the Spring '08 term at University of Central Florida.
- Spring '08