Question

On July 1, 2016, P Corporation acquired all the stock of S Corporation for $42,000 and included S Corporation in its US Consolidated tax return. On the acquisition date, S has accumulated earnings and profits of $14,000. During the period July1-December 31, 2016, S Corporation incurred a taxable loss of $9,000. S Corporation had earnings of $18,000 in 2017, and made a distribution of $15,000 to P Corporation on October 1.

A) Determine P’s basis in S stock as of December 31, 2017.

B) What are the requirements for S to be included in P Corporation's US consolidated tax return?

Answer 1

A). P’s basis in S stock as of December 31, 2017:

Stock acquired =   $42,000 ( inclusive of accumulated earnings and profits of $ 14,000)

Loss During July 1 to Dec 31, 2016 = -$9,000

Earnings in 2017 =   $18,000

Distribution of profits = -$15,000

P’s basis in S stock as of December 31, 2017 = $36,000

B). Requirements for S to be included in P Corporation's US consolidated tax return:

1. Consent by S corporation is required, which subsidiaries do by filing Form 1122, Authorization and Consent of Subsidiary Corporation To Be Included in a Consolidated Income Tax Return and attaching it to their group's Form 1120.

2. S corporation must determine its taxable income, gains, deductions, and losses.

3. S corporation must account for inter-company transactions, which are those transactions between 2 members of the group.

4. S corporation must then determine its net income or loss by excluding those items that have to be consolidated, and this net income or loss is referred to as the separate taxable income. The items that are generally calculated on a consolidated basis include: capital gains, net losses, charitable contributions deduction, net operating loss deductions, and the dividend-received deduction.

5. The separate taxable incomes of S corporation are totaled with other affiliates(if any) and then the consolidated items are netted among the group to arrive at the group's consolidated taxable income (CTI).