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Unformatted text preview: ANSWER KEY
P and S1 Corporations are members of an affiliated group at the beginning of the current year (a
non-leap year). A and B Corporations are not included in the affiliated group because they are
brother-sister corporations to P and fail to satisfy the Sec. 1504(a) stock ownership requirements
(no single ownership chain includes both A and P or B and P Corporations). The sale of the A
stock has no effect on the affiliated group for consolidated tax return purposes because A is not a
member of the affiliated group at any time in the current year. The acquisition of the S2 stock by
S1 creates a new member of the affiliated group. S1 owns the necessary 80% of the voting
power and value of the S2 stock (excluding the nonconvertible, nonvoting preferred stock that is
not considered to be "stock" under Sec. 1504(a)(4)). The affiliated group includes the income
and expenses of S2 starting with the day after the November 25 acquisition date through
December 31 (Reg. Sec. 1.1502-76(b)).
The controlled group test applies on December 31st of the tax year in question (Sec.
1563(b)(1)). On that date B, P, S1, and S2 apparently would constitute a combined controlled
group under Sec. 1563(a)(3). However, Sec. 1563(b)(3) considers a corporation to be a member
of a controlled group under the "additional member" rule if the corporation (1) is a member of a
controlled group of corporations at any time during a calendar year, (2) is not a member of the
group on December 31st of the calendar year, and (3) is a member of such group for one-half (or
more) of the number of days in such tax year which precede December 31st. A Corporation
satisfies this requirement because it was a member of the controlled group from January 1
through July 10 (191 days) even though it is not a member of group on December 31st. A has
been a member of the controlled group for more than half of the 365 days in the current year
(assuming a non-leap year).
S2 is an excluded corporation under Sec. 1563(b)(2)(A) and, therefore, is not a part of the
controlled group. S2 is excluded because it was a member of the group for 35 days in the tax
year that preceded December 31st (it was a member for less than half of the 365 days in the
current year). See Temp. Reg. Sec. 1.1563-IT(b)(4) for examples that illustrate the counting of
days for this purpose.
The current year controlled group is thus comprised of P, S1, A, and B Corporations.
This group is known as a combined group. The four corporations would share equally the
reduced tax rate benefits of Sec. 11(b) unless a special allocation of these benefits was elected
for the current year under Temp. Reg. Sec. 1.1561-2T. Temporary Reg. Sec. 1.1561-2T(b) and
(c) provide guidance on allocating the reduced tax rate benefits in this circumstance. In future
years, P, S1, S2, and B will be the only four members of the controlled group unless an
acquisition or disposition takes place. The required tax returns for the current year are as follows: Corporation
S2 Period Consolidated or
Separate Return 1/1 - 12/31
1/1 - 12/31
1/1 - 12/31
1/1 - 12/31
1/1 - 11/25
11/26 - 12/31 Separate
Consolidated If S2's books are not closed on November 25, S2 allocates its nonextraordinary items of
income, gain, expense, loss, and credits to the periods before and after the acquisition date based
on the relative number of days in each period. S2 allocates its extraordinary items to the day S2
reports them under its normal tax accounting methods.
The easiest way for B to become a member of the affiliated group is for Angela to
contribute her B stock to one of the current members of the affiliated group (P, S1, or S2) in a
nontaxable transfer under Sec. 351. Because P owns all the stock of S1 and S2, P may be the
best choice to become B’s parent corporation. ...
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This note was uploaded on 01/18/2012 for the course HOMEWORK AC420 taught by Professor Atkins during the Spring '11 term at Kaplan University.
- Spring '11