Question
In: Accounting
On January 1, 2020, Penguin Corporation, the parent corporation of a consolidated group of corporations filing...
On January 1, 2020, Penguin Corporation, the parent corporation of a consolidated group of corporations filing a calendar year consolidated tax return, acquires all of the stock of Steeler corporation for $3 million. In 2020, Steeler Corporation earns $500,000 of taxable income, it earns $20,000 of tax-exempt interest income, it pays Penguin corporation a dividend of $400,000. Steeler pays Penguin an amount equal to its stand-alone income tax liability for 2020, computed at the statutory tax rate of 21%. Compute Penguin’s year-end 2020 tax basis in Steeler stock.
Solutions
Expert Solution
For a 80% or more owned domestic corporation, dividends are not included in the income if consolidated tax return is filled. However, the basis of the parent in the subsidiary is reduced by the amount of dividend received.
Thus the basis of Steeler's stock held by Penguin as at Dec 31, 2020 would be calculated as follows:
| Beginning Basis | $ 3,000,000.00 |
| Add: tax on subsidiary income | $ 105,000.00 |
| Less: Dividend distribution | $ (400,000.00) |
| less: Tax libility distribution | $ (105,000.00) |
| Ending Basis | $ 2,600,000.00 |
For any clarification, please comment. Kindly Up Vote
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