Question

Yes, this is a Taxation subject. But the system does not have that category, so selected Accounting.

Zero Corporation is the parent corporation of a consolidated group of corporations that file a consolidated calendar year tax return. Its members include subsidiaries Loss Corporation and Gain Corporation. As of the end of 2019, the consolidated group hada net operating loss carryforward of $5 million. All of the net operating loss carryforward is attributable to losses of Loss Corporation.

On April 30, 2020, Zero Corporation sold all of the stock of Loss Corporation at a purchase price that resulted in a gain of $100,000. Loss corporation’s taxable income for 2020 is $1.2 million, $400,000 of which was earned in the first 4 months of 2020.

For 2020, Zero Corporation earned $2 million of taxable income, including the $100,000 gain on the sale of loss corporation, and Gain corporation earned $4 million of taxable income.

How much of the $5 million net operating loss carryforward will Loss Corporation take with it when it leaves the Zero consolidated group on April 30, 2020? How must Loss corporation report its taxable income for 2020?

Answer 1

Data available with us at the year end of 2019 is-

1. Net operating loss for the subsidiary loss corporation is $5 million.

2.Consolidated Net operating loss of zero corporation due to loss corporation is $5 million.

Data available with us on april 30,2020 is-

Taxable income for the first four months of Loss corporation is $400000

Taxable income for the year 2020 of Loss corporation is $1.2 million

Answer to the question is as follows-

Since Loss corporation is 100% subsidiary to zero corporation.

Hence,$100000 loss of loss corporation will takes out of $5 million when it leaves the zero consolidated group as on April 30,2020.

and Taxable income of Loss corporation for the year 2020 is $700000($1200000-$500000)