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Chapter 08 - Consolidated Tax Returns
1. Business reasons, and not tax incentives, constitute the primary motivation for most corporations to form a
conglomerate and file tax and financial accounting reports on a consolidated basis.
a. True
b. False
ANSWER: True
RATIONALE: Nontax incentives predominate over tax motivations.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: SCPE.HRMY.15.LO: 8-01 - LO: 8-01
SCPE.HRMY.15.LO: 8-03 - LO: 8-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS: United States - AK - AICPA: FN-Measurement -
AICPA: FN-Measurement
KEYWORDS: Bloom's: Knowledge
OTHER: Time: 2 min.
2. A consolidated Federal income tax return may be the product of a merger of the affiliates, or of a stock-for-assets
takeover.
a. True
b. False
ANSWER: True
RATIONALE: The creation of an affiliated group might be the result of a tax-deferred restructuring of the
capital of the affiliates.
POINTS: 1
DIFFICULTY: Easy
STATE STANDARDS: United States - AK - AICPA: FN-Reporting
OTHER: Time: 2 min.
3. The consolidated return rules are designed to allow a tax-neutral means by which to elect to file on a consolidated basis.
a. True
b. False
ANSWER: True
RATIONALE: The rules are designed to achieve organizational neutrality.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
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4. Most of the Federal consolidated income tax return rules are found in detailed sections of the tax Regulations.
a. True
b. False
ANSWER: True
RATIONALE: Legislative Regulations are the source of most of the consolidated return rules. These
regulations seldom are challenged successfully in the courts.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
5. The rules for computing Federal consolidated taxable income are some of the most complex in the tax law.
a. True
b. False
ANSWER: True
RATIONALE: The tax rules in this area can be difficult to understand.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
6. For consolidated tax return purposes, purchased goodwill is amortized as a deduction to taxable income over 15 years.
Under financial accounting rules, 40-year amortization is allowed.
a. True
b. False
ANSWER: False
RATIONALE: For book purposes, changes in the value of the purchased goodwill can become revenue and
expense items, but no amortization is allowed over a fixed period of years.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
7. A limited partnership can join the parent’s consolidated group for book and for tax purposes.
a. True
b. False
ANSWER: False
RATIONALE: Only U.S. C corporations can join a Federal consolidated return.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES:SCPE.HRMY.15.LO: 8-02 - LO: 8-02
SCPE.HRMY.15.LO: 8-04 - LO: 8-04
OTHER: Time: 2 min.
8. After a takeover, the parent’s balance sheet shows a fair market value cost basis in the subsidiary, for both book and tax
purposes.
a. True
b. False
ANSWER: False
RATIONALE: The tax rule as to the basis of the subsidiary stock depends on the form of the takeover:
carryover basis is used where the tax-deferred reorganization rules are met (see Chapter 7),
but a FMV basis is taken when the subsidiary is acquired by purchase in a taxable event.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
9. When the parent acquires 51% of a subsidiary U.S. corporation, the subsidiary can join the consolidated financial
statements and the consolidated tax return of the parent.
a. True
b. False
ANSWER: False
RATIONALE: For tax purposes, the ownership requirement usually is 80% or more of the subsidiary’s
stock.
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-04 - LO: 8-04
OTHER: Time: 2 min.
10. A consolidated Federal income tax group must meet the eligibility requirements of the Regulations on the first day of
the first year for which the election to consolidate is effective, and then on the last day of every succeeding tax year.
a. True
b. False
ANSWER: False
RATIONALE: The compliance and eligibility rules of the consolidated tax return must continue to be met on
every day for which the consolidation election is in effect.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
11. The right to file on a consolidated basis is available to a group of corporations when they constitute a “parent-
subsidiary affiliated group.”
a. True
b. False
ANSWER: True
RATIONALE: Consolidated return status is available to affiliated, not controlled, groups.
POINTS: 1
DIFFICULTY: Easy
KEYWORDS: Bloom's: Comprehension
OTHER: Time: 2 min.
12. A Federal consolidated group can claim a dividends received deduction for payments that the parent receives from
other affiliates.
a. True
b. False
ANSWER: False
RATIONALE: A consolidated group eliminates an intercompany dividend. As a result, no dividends
received deduction is available for these payments.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
13. Giant Ltd. owns 100% of the stock of Middle Corporation. BottomCorp is owned 60% by Giant and 40% by Middle.
Giant’s Federal consolidated income tax return includes both Middle and Bottom.
a. True
b. False
ANSWER: True
RATIONALE: The required ownership is 80% for tax purposes, counting multiple tiers of ownership among
the group members.
POINTS: 1
DIFFICULTY: Moderate
OTHER: Time: 2 min.
14. A subsidiary corporation must leave the consolidated group if it is restructured as an LLC.
a. True
b. False
ANSWER: True
RATIONALE: Non-corporate entities are not eligible to join a Federal consolidated group. The rules to
qualify to elect as a consolidated group must continue to be met.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
15. A corporation organized in Germany and wholly owned by the U.S. parent can be included in a Federal consolidated
return.
a. True
b. False
ANSWER: False
RATIONALE: Only affiliates that are organized in the U.S. or in a U.S. possession can join a consolidated
group.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
16. A tax-exempt charitable trust, created by a U.S. C corporation, can join in a Federal consolidated return.
a. True
b. False
ANSWER: False
RATIONALE: Tax-exempt organizations are ineligible to join Federal consolidated returns.
POINTS: 1
OTHER: Time: 2 min.
17. A joint venture, taxed like a partnership, can join in a consolidated Federal income tax return.
a. True
b. False
ANSWER: False
RATIONALE: All group members must be U.S. corporations.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
18. A calendar year parent corporation wants to file its tax returns on a consolidated basis with its affiliates. The group’s
election to file consolidated Federal corporate income tax returns must be made by the extended due date of the first
return on which the consolidation is applied (i.e., September 15).
a. True
b. False
ANSWER: True
RATIONALE: The reference date for the election is the tax year of the group’s parent corporation.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
19. Campbell Corporation left the Crane consolidated tax return group after the calendar 2014 tax year. Generally, Crane
can add Campbell back to the consolidated group, but no earlier than for the 2020 tax year.
a. True
b. False
ANSWER: True
RATIONALE: In most cases, an affiliate can rejoin the same consolidated group only after five tax years
pass.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
20. The calendar year Sterling Group files its Federal corporate income tax return on a consolidated basis. The group’s
Form 1120 is due on March 15, or September 15 if an extended due date is approved by the IRS.
a. True
b. False
ANSWER: True
RATIONALE: A six-month filing extension can be approved automatically by the IRS.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
21. All affiliates joining in a newly formed consolidated return must consent to the election on Form 1122, as attached to
the Form 1120 for the group.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
22. Consolidated group members each are jointly and severally liable for the entire consolidated income tax liability.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
23. With the filing of its first consolidated return, the parent corporation of a Federal consolidated group makes an
irrevocable election as to how the group will allocate a tax year’s income tax liability among the group members.
a. True
b. False
ANSWER: False
RATIONALE: Group members all must agree on the tax-sharing method that is used. That election can be
changed, without IRS permission, for every tax year.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
24. A Federal consolidated tax return group can apply the “relative taxable income” method as a means to apportion the
tax liabilities of the members among the affiliates.
a. True
b. False
ANSWER: True
RATIONALE: The regulations allow other tax-sharing methods as well.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
25. Each of the members of a Federal consolidated tax return group can claim its own $40,000 AMT exemption, subject to
phase-out.
a. True
b. False
ANSWER: False
RATIONALE: Affiliated group members share one AMT exemption, as do the members of all parent-
subsidiary controlled groups.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
26. Consolidated group members each must use the same tax year end, and all of the members must use the same tax
accounting methods (e.g., LIFO or FIFO).
a. True
b. False
ANSWER: False
RATIONALE: Members must conform to the parent’s tax year, but tax accounting methods can differ
among the members.
POINTS: 1
OTHER: Time: 2 min.
27. When the net accumulated taxable losses of a subsidiary exceed the parent’s acquisition price, the parent’s basis in the
subsidiary’s stock becomes negative.
a. True
b. False
ANSWER: False
RATIONALE: An excess loss account is created. Stock basis in a subsidiary cannot be less than zero.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
28. If subsidiary stock is redeemed or sold outside the group when an excess loss account exists, the selling parent
corporation recognizes ordinary income equal to the account balance.
a. True
b. False
ANSWER: False
RATIONALE: The parent usually recognizes a capital gain equal to the excess loss account. Any remaining
gain often constitutes ordinary income.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
29. In computing consolidated E & P, dividends paid to the parent by group members are subtracted.
a. True
b. False
ANSWER: False
RATIONALE: There is no such concept as consolidated E & P in the Federal income tax law. Each entity
accounts for its own E & P on a separate basis, including its share of gain/loss from
intercompany transactions, and decreasing E & P by its apportioned share of consolidated
tax liabilities. Dividends paid within the group are eliminated when the consolidated tax return
is prepared.
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-07 - LO: 8-07
OTHER: Time: 2 min.
30. In computing consolidated E & P, a negative adjustment is allowed for the group’s disallowed travel and
entertainment expenditures.
a. True
b. False
ANSWER: False
RATIONALE: There is no such concept as consolidated E & P in the Federal income tax law. Each entity
accounts for its own E & P on a separate basis, reducing E & P for its allocated share of the
year’s Federal income tax liability.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
31. In computing consolidated taxable income, the domestic production activities deduction (DPAD) is removed from the
taxable incomes of the group members and determined on a group basis.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-09 - LO: 8-09
OTHER: Time: 2 min.
32. In computing consolidated taxable income, compensation amounts are removed from the taxable incomes of the group
members and determined on a group basis.
a. True
b. False
ANSWER: False
RATIONALE: Compensation is not a group item.
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-06 - LO: 8-06
SCPE.HRMY.15.LO: 8-09 - LO: 8-09
OTHER: Time: 2 min.
33. In computing consolidated taxable income, capital gains and losses are removed from the taxable incomes of the
group members and determined on a group basis.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-06 - LO: 8-06
SCPE.HRMY.15.LO: 8-09 - LO: 8-09
OTHER: Time: 2 min.
34. The starting point in computing consolidated taxable income is the sum of the separate Federal taxable income
amounts of the affiliated group members.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-09 - LO: 8-09
OTHER: Time: 2 min.
35. An example of an intercompany transaction is the use of the trademarks of the parent corporation by a subsidiary for
an arm’s length licensing fee.
a. True
b. False
ANSWER: True
RATIONALE: The payor’s deduction is deferred under § 267 until the recipient recognizes gross income.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
36. When a subsidiary sells to the parent some business-use property that has appreciated from its $20,000 basis to a
$50,000 fair market value, the subsidiary immediately recognizes $30,000 ordinary income on the consolidated return.
a. True
b. False
ANSWER: False
RATIONALE: The gain is deferred until the property leaves the group by sale or other exchange. The
amount of the gain for purposes of the eliminating entry is $30,000.
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-09 - LO: 8-09
OTHER: Time: 2 min.
37. Lacking elections to the contrary, Federal consolidated NOLs are carried back two years and then forward twenty
years.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
38. When a consolidated NOL is generated, each affiliate is allocated a share of the loss.
a. True
b. False
ANSWER: True
RATIONALE: Apportionment of the group’s NOL is made among the members, on a proportionate basis.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
39. Keep Corporation joined an affiliated group by merger in 2016. The group generated a consolidated 2016 NOL, and
Keep’s share of the loss was $50,000. Lacking an election by the parent to the contrary, Keep can carry the loss back to its
separate 2014 return, and the parent can claim a tax refund.
a. True
b. False
ANSWER: False
RATIONALE: Unless the parent elects to forgo the loss carryback, any refund is paid to Keep separately.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
40. Keep Corporation joined an affiliated group by merger in 2010. The group generated a 2016 consolidated NOL, and
Keep’s share of the loss was $50,000. Keep’s share of the loss is included in the group’s NOL carryforward to 2017.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
41. When a member departs from a consolidated group, it leaves behind any NOLs that it generated while in the group.
The parent corporation and remaining affiliates apply those NOLs against future consolidated taxable income.
a. True
b. False
ANSWER: False
RATIONALE: The affiliate takes its apportioned loss with it.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
42. Cooper Corporation joined the Duck consolidated Federal income tax return group, when Cooper held a $1 million
NOL carryforward. In its first year as a part of the Duck group, Cooper generated a $150,000 operating profit. For that
year, Duck can deduct only $150,000 of Cooper’s NOL in computing consolidated taxable income.
a. True
b. False
ANSWER: True
RATIONALE: The deduction for a SRLY loss is limited to the lesser of the loss corporation’s current or
cumulative positive contribution to the group’s consolidated taxable income. Here, that
amount is the current year’s $150,000 profit.
POINTS: 1
DIFFICULTY: Easy
KEYWORDS: Bloom's: Application
OTHER: Time: 2 min.
43. Cooper Corporation joined the Duck consolidated Federal income tax return group, when Cooper held a $1 million
NOL carryforward. In its first year as a part of the Duck group, Cooper generated a $150,000 taxable loss. For that year,
Duck cannot deduct any of Cooper’s NOL in computing consolidated taxable income.
a. True
b. False
ANSWER: True
RATIONALE: The deduction for a SRLY loss is limited to the lesser of the loss corporation’s current or
cumulative positive contribution to the group’s consolidated taxable income. Here, that
amount equals the current-year Cooper profit.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
44. The losses of a consolidated group member are subject to both the SRLY rules and a § 382 limitation. When both
limitations apply, the § 382 restrictions override the SRLY rules for this affiliate.
a. True
b. False
ANSWER: True
RATIONALE: Section 382 limits prevail over SRLY restrictions, under the “overlap rule.”
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
45. A Federal consolidated filing group aggregates its separate charitable contributions for the tax year, deductions for
which then are subject to an annual limitation of 10% of consolidated taxable income.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
46. The foreign tax credit of a consolidated group can be greater than the sum of the credits of the group members when
filing separately.
a. True
b. False
ANSWER: True
RATIONALE: Optimizing deductions and credits is a potential advantage of consolidation.
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-09 - LO: 8-09
OTHER: Time: 2 min.
47. A penalty can be assessed by the IRS if the parent corporation does not keep good records to support the computation
of a subsidiary’s stock basis.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
48. Which of the following potentially is a disadvantage of electing to file a Federal consolidated corporate income tax
return?
a. The consolidated ACE adjustment could be reduced for the filing group.
b. The taxation of intercompany dividends is not eliminated. Recognition of losses from certain intercompany
transactions is deferred.
c. The tax basis of investments in the stock of subsidiaries is unaffected by members contributing to consolidated
taxable income.
d. The § 1231 loss of one member is not offset against the § 1231 gain of another member of the group.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
49. Which of the following is not generally a disadvantage of filing Federal corporate income tax returns on a
consolidated basis?
a. Net capital losses from one affiliate can offset the capital gains from another. This can reduce the tax liabilities
of the group as a whole.
b. Realized losses from transactions between affiliates are not recognized immediately.
c. Compliance costs usually are higher when a consolidation election is in effect.
d. The election generally is binding for future tax years.
ANSWER: a
RATIONALE: This is an advantage of consolidation.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
50. Which of the following potentially is a disadvantage of electing to file a Federal corporate income tax consolidated
return?
a. Increased deduction amounts when computations are made on a group basis.
b. Deferral of gains realized in transactions between group members.
c. Increased basis in the stock of a subsidiary that generates annual taxable income.
d. Additional administrative costs in complying with the election.
ANSWER: d
RATIONALE: All of the items may be computed on a group basis and be used to manage the tax liabilities
of the group as a whole.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
51. Which of the following is not a requirement that must be met before a group files a consolidated return?
a. None of the corporations can be ineligible under the Code to file on a consolidated basis with the others.
b. All of the corporations must be members of an affiliated group.
c. The group members must share the same inventory accounting method.
d. The group members must share a common tax year end.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-04 - LO: 8-04
SCPE.HRMY.15.LO: 8-05 - LO: 8-05
OTHER: Time: 5 min.
52. Which of the following tax effects becomes more restrictive if an election is made to file a group’s Federal corporate
income tax returns on a consolidated basis?
a. Choice of members’ tax accounting methods
b. Use of the lower tax rate brackets.
c. Use of the $40,000 AMT exemption.
d. Members who are liable for the consolidated tax liability.
ANSWER: d
RATIONALE: The others are treated alike even if no election to consolidate is made, because the
controlled group rules also apply. Consolidated group members are jointly and severally
liable for the consolidated tax liability.
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-05 - LO: 8-05
OTHER: Time: 5 min.
53. Which of the following entities is eligible to file Federal income tax returns on a consolidated basis?
a. A U.S. C corporation that files on a separate basis for its state income tax returns.
b. The charitable foundation of a U.S. C corporation.
c. The liquidating trust of a U.S. C corporation.
d. A wholly owned French subsidiary of a U.S. C corporation.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
54. Which of the following entities is eligible to file Federal income tax returns on a consolidated basis?
a. Professional sports team operating as a limited partnership.
b. Japanese corporation engaged in multinational operations, including two-thirds of its activities in the U.S.
c. Japanese corporation engaged in multinational operations, including one-third of its activities in the U.S.
d. U.S. corporation engaged in the nuclear energy industry.
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
55. Which of the following entities is eligible to join in a Federal consolidated return?
a. A sole proprietor with annual sales of more than $50 million.
b. A U.S. corporation’s § 401(k) plan.
c. A partnership organized in Germany.
d. A corporation that operates in seven different U.S. states.
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
56. The Rack, Spill, and Ton Corporations file Federal income tax returns on a consolidated basis. The group’s tax return
currently is under audit. Under a valid tax-sharing agreement, each corporation is liable for one-third of the group’s
consolidated tax liability. The affiliates have agreed with the auditor that the group’s unpaid liability for the year is
$90,000. Because of an incorrect tax return position, another $3,000 in interest and an $18,000 penalty is attributable
solely to Ton.
At present, only Rack is solvent and has the cash with which to make such a tax payment. What is the maximum amount
for which the government could be successful in forcing Rack to satisfy the outstanding liabilities of the consolidated
group?
a. $0
b. $90,000
c. $93,000
d. $108,000
e. $111,000
ANSWER: e
RATIONALE: Each member has joint and several liability for the entire amount of the group’s income taxes,
interest, and penalties outstanding.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
57. How must the IRS collect the liability for Federal taxes from among a consolidated group?
a. Against the parent of the group.
b. According to the members’ current internal tax-sharing agreement.
c. Against the member of the group that generated the tax.
d. No particular order of collection is prescribed by IRS rules.
ANSWER: d
RATIONALE: The IRS is not bound to follow a group’s internal tax-sharing agreement.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
58. How do the members of a Federal consolidated group split among themselves the benefits of the lower tax brackets on
the first $75,000 of taxable income?
a. According to their relative net asset holdings.
b. According to an internal tax-sharing agreement.
c. According to an internal tax-sharing agreement, which may be modified by the IRS upon audit.
d. According to a tax-sharing agreement that must be approved by the IRS by the end of the first quarter of the
tax year.
ANSWER: b
RATIONALE: This agreement is respected by the government if all group members agree to it in writing.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
59. Conformity among the members of a consolidated group must be implemented for which of the following tax items?
a. Use of foreign tax payments (i.e., as a credit or deduction).
b. Tax accounting method (i.e., cash or accrual).
c. Inventory accounting method (e.g., FIFO or dollar-cost averaging).
d. Tax year-end.
ANSWER: d
RATIONALE: The group members all must use the parent’s tax year-end.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
60. How are the members of a Federal consolidated group affected by computations related to E & P?
a. Each member keeps its own E & P account.
b. E & P is computed solely on a consolidated basis.
c. Members’ E & P balances are frozen as long as the consolidation election is in place.
d. Consolidated E & P is computed as the sum of the E & P balances of each of the group members, computed on
the last day of the tax year.
ANSWER: a
RATIONALE: There is no such concept as consolidated E & P in the Federal income tax law.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
61. Calendar year ParentCo acquired all of the stock of SubCo on January 1, 2013, for $1,000,000. The parties
immediately elected to file consolidated income tax returns. SubCo generated taxable income of $250,000 for 2013 and
paid a dividend of $100,000 to ParentCo. In 2014, SubCo generated an operating loss of $350,000, and in 2015 it
produced taxable income of $750,000. As of the last day of 2015, what was ParentCo’s basis in the stock of SubCo?
a. $1,650,000
b. $1,550,000
c. $1,000,000
d. $0
ANSWER: b
RATIONALE: ParentCo’s initial stock basis was $1,000,000. Positive adjustments to basis include the
$250,000 income for 2013 and the $750,000 of income for 2015. Negative adjustments to
basis include the $100,000 dividend paid to ParentCo in 2013 and the $350,000 loss in 2015.
Purchase price for SubCo, initial basis $1,000,000
2013 Income 250,000
2013 Dividend (100,000)
2014 Loss (350,000)
2015 Income 750,000
ParentCo’s Basis in SubCo stock, 12/31/2015 $1,550,000
POINTS: 2
DIFFICULTY: Challenging
OTHER: Time: 10 min.
62. Calendar year ParentCo purchased all of the stock of SubCo on January 1, 2013, for $500,000. SubCo produced a loss
for 2013 of $150,000 and distributed cash of $25,000 to ParentCo. In 2014, SubCo generated a loss of $450,000; in 2015,
it recognized net income of $90,000. What is ParentCo’s capital gain or (loss) if it sells all of its SubCo stock to a
nongroup member on January 1, 2016, for $150,000?
a. $185,000
b. $150,000
c. ($35,000)
d. ($535,000)
e. All gain/loss is ordinary when subsidiary stock is sold.
ANSWER: a
RATIONALE: When accumulated deficits in the subsidiary’s post-acquisition earnings and profits exceed
the acquisition price, an excess loss account is created to permit the group to recognize
current subsidiary losses, while avoiding a negative stock basis. If the subsidiary stock is sold
to a nongroup member, the balance of the excess loss account is recognized as capital gain
income by the seller.
Sales Proceeds $150,000
Purchase price of SubCo $500,000
2013 Loss (150,000)
2013 Dividend (25,000)
2014 Loss (450,000)
2015 Income 90,000
Stock basis in subsidiary –0–
Balance of Excess Loss Account 35,000
Capital Gain $185,000
POINTS: 2
63. ParentCo owned 100% of SubCo for the entire year, and both companies use the accrual method of tax accounting.
During the year, SubCo purchased $20,000 of supplies from ParentCo. In addition, SubCo provided internal audit services
to ParentCo, which were worth $40,000. Including these transactions, ParentCo’s separate taxable income was $75,000,
and SubCo’s separate taxable income was $100,000. What is the group’s consolidated taxable income for the year?
a. $215,000
b. $195,000
c. $175,000
d. $155,000
ANSWER: c
RATIONALE: As a general rule, intercompany transactions are not eliminated by group members, but the
transactions do tend to cancel each other out. In this instance, ParentCo has $20,000 of
income from the sale of supplies to SubCo, and SubCo has a $20,000 deduction. SubCo has
$40,000 of income for the services rendered to ParentCo, and ParentCo has a $40,000
deduction. Thus, consolidated taxable income in this instance is $175,000, the sum of the
ParentCo and SubCo separate taxable incomes.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
64. ParentCo owned 100% of SubCo for the entire year. ParentCo uses the accrual method of tax accounting, whereas
SubCo uses the cash method. During the year, SubCo sold raw materials to ParentCo for $35,000 under a contract that
requires no payment to SubCo until the following year.
Exclusive of this transaction, ParentCo had income for the year of $30,000, and SubCo had income of $50,000. The
group’s consolidated taxable income for the year was:
a. $165,000.
b. $150,000.
c. $115,000.
d. $80,000.
ANSWER: d
RATIONALE: Since SubCo uses the cash method of accounting, it will not recognize the $35,000 of income
for the materials sold to ParentCo until the next tax period (when payment is received).
ParentCo’s related deduction must also be deferred until the later year. The group’s
consolidated taxable income is $80,000, the sum of ParentCo’s and SubCo’s separate
incomes.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
65. ParentCo and SubCo have filed consolidated returns since both entities were incorporated in 2012. Taxable income
computations for the members include the following. Neither group member incurred any capital gain or loss transactions
during these years, nor did they make any charitable contributions.
ParentCo’s SubCo’s Taxable Consolidated

Year Taxable Income Income Taxable Income
2012 $100,000 $ 35,000 $135,000
2013 $100,000 ($ 20,000) $ 80,000
2014 $100,000 ($109,000) ?
2015 $100,000 $190,000 ?
The 2014 consolidated loss:
a. must be carried forward, unless an election to forgo carryforward is made by the parent.
b. must be carried back, unless an election to forgo the carryback is made by the parent.
c. can be used only to offset SubCo’s future income.
d. cannot be used to offset any of ParentCo’s 2012 income.
ANSWER: b
RATIONALE: A net operating loss arising in a consolidated return year must first be carried back two years
(starting with the earliest year), and thereafter, if not completely absorbed, may be carried
forward. However, the parent can elect to forgo any carryback, and thus carry the loss
forward. The use of the 2014 loss is not limited to SubCo income amounts, since the
companies have filed consolidated returns for all years of their existence.
POINTS: 2
DIFFICULTY: Easy
OTHER: Time: 5 min.
66. The consolidated net operating loss of the Parent Group includes all of the following except:
a. Parent’s operating income/loss.
b. Parent’s charitable contributions.
c. Parent’s dividends received deduction.
d. Subsidiary’s operating income/loss.
ANSWER: b
RATIONALE: The charitable deduction has its own carryover period.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
67. The Harris consolidated group reports a net operating loss (NOL) for the year. The tax law works to:
a. Allow unused charitable contributions a 20-year carryforward.
b. Disallow any carrybacks of NOL deductions.
c. Keep the consolidated group from benefiting when the election to consolidate is motivated chiefly by tax
reduction strategies.
d. All of the above statements describe effects of the consolidated return rules.
ANSWER: c
RATIONALE: Consolidated NOLs can be carried back two tax years. Charitable contributions are not
included in an NOL carryover.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
68. ParentCo purchased 100% of SubCo’s stock on January 1, 2014, and the companies have filed consolidated returns
since then. Taxable income computations for the members include the following. Neither group member incurred any
capital gain or loss transactions during these years, nor did they make any charitable contributions.
ParentCo’s SubCo’s Taxable Consolidated

2013 $100,000 $ 70,000 N/A
2014 $100,000 ($ 70,000) $30,000
2015 $ 12,000 ($ 20,000) ?
2016 $100,000 $200,000 ?
The 2015 net operating loss:
a. may be carried back to offset SubCo’s 2013 taxable income.
b. may be carried forward only and applied against group income if so elected by ParentCo.
c. cannot be carried back against 2013 SubCo income, as consolidated returns were not filed.
d. either a or b, but not both.
ANSWER: d
RATIONALE: The $8,000 (not $20,000) 2015 net operating loss may be carried back against SubCo’s 2013
taxable income, as SubCo is solely responsible for generating the loss. Alternatively,
ParentCo could elect to forgo the carryback of the 2015 consolidated loss, thus preserving the
loss deduction for the group’s subsequent years.
POINTS: 2
DIFFICULTY: Easy
OTHER: Time: 5 min.
69. The Nannerl consolidated group reported the following taxable income amounts. Parent owns all of the stock of both
Junior and Minor. Determine the net operating loss (NOL) that is apportioned to Junior.
Parent ($400,000)
Junior ($600,000)
Minor $100,000
a. $500,000.
b. $540,000.
c. $600,000.
d. $0. All NOLs of a consolidated group are apportioned to the parent.
ANSWER: b
RATIONALE: Junior’s separate NOL $600,000
Consolidated NOL $900,000 ×
Aggregate separate NOLs $1,000,000
POINTS: 2
DIFFICULTY: Easy
OTHER: Time: 5 min.
70. The Nanie consolidated group reported the following taxable income amounts. Parent owns all of the stock of both
Junior and Minor. Determine the net operating loss (NOL) that is apportioned to Minor.
Parent ($400,000)
Junior ($600,000)
Minor $100,000
a. $100,000.
b. $300,000.
c. $0. Minor did not report an NOL of its own.
d. $0. All NOLs of a consolidated group are apportioned to the parent.
ANSWER: c
RATIONALE: Only members with separate NOLs are apportioned any of the consolidated NOL.
POINTS: 2
DIFFICULTY: Easy
OTHER: Time: 5 min.
71. The Maestro consolidated group reported the following taxable income amounts. Parent owns all of the stock of both
Junior and Minor. Determine the net operating loss (NOL) that is apportioned to Parent.
Parent ($400,000)
Junior ($600,000)
Minor $100,000
a. $360,000.
b. $400,000.
c. $500,000.
d. $900,000. All NOLs of a consolidated group are apportioned to the parent.
ANSWER: a
RATIONALE: Parent’s separate NOL $400,000
Consolidated NOL
Aggregate separate NOL ×
$900,000 ×
$1,000,000
POINTS: 2
DIFFICULTY: Easy
OTHER: Time: 5 min.
72. ParentCo, SubOne and SubTwo have filed consolidated returns since 2014. All of the entities were incorporated in
2013. Taxable income computations for the members include the following. None of the group members incurred any
capital gain or loss transactions during these years, nor did they make any charitable contributions.
ParentCo’s SubOne’s Taxable SubTwo’s Taxable Consolidated

Year Taxable Income Income Income Taxable Income
2013 $200,000 $ 50,000 $150,000 N/A
2014 $200,000 ($ 60,000) $ 70,000 $210,000
2015 $ 20,000 ($ 60,000) ($ 40,000) ?
2016 $200,000 $130,000 $ 10,000 ?
How should the 2015 consolidated net operating loss be apportioned among the group members?
ParentCo SubOne SubTwo

a. $80,000 $ 0 $ 0
b. $ 0 $60,000 $40,000
c. $ 0 $40,000 $40,000
d. $ 0 $48,000 $32,000
ANSWER: d
RATIONALE: SubOne’s Apportioned NOL = $48,000
= $80,000 × [$60,000 ÷ ($60,000 + $40,000)]
SubTwo’s Apportioned NOL = $32,000
= $80,000 × [$40,000 ÷ ($60,000 + $40,000)]
POINTS: 3
73. ParentCo and SubOne have filed consolidated returns since 2012. SubTwo was formed in 2014 through an asset spin-
off from ParentCo. SubTwo has joined in the filing of consolidated returns since then. Taxable income computations for
the members include the following. None of the group members incurred any capital gain or loss transactions during these
years, nor did they make any charitable contributions.
ParentCo’s SubOne’s Taxable SubTwo’s Taxable Consolidated

Year Taxable Income Income Income Taxable Income
2013 $100,000 $ 50,000 N/A $150,000
2014 $ 30,000 ($ 30,000) $10,000 $ 10,000
2015 $ 50,000 ($ 40,000) ($40,000) ?
2016 $130,000 $130,000 $10,000 ?
If ParentCo does not elect to forgo the carryback of the 2015 net operating loss, how much of the 2015 consolidated net
operating loss is carried back to offset prior years’ income?
a. $80,000
b. $40,000
c. $30,000
d. $0
ANSWER: c
RATIONALE: For a consolidated return, current year operating losses first are used to reduce the current
year income of the group and thereafter may be carried back or forward. The group has a net
operating loss for 2015 of $30,000. Of this amount, $15,000 is allocable to SubOne [$30,000
NOL × $40,000 ÷ ($40,000 + $40,000)], and $15,000 is allocable to SubTwo. The Offspring
Rule applies because SubTwo became a member of the group immediately upon its
incorporation. Accordingly, the group may carry back SubTwo’s 2015 loss to offset the
group’s 2013 consolidated taxable income, as well as SubOne’s, despite the fact that SubTwo
was not yet in existence.
POINTS: 3
74. Which of the following items is not computed on a consolidated basis?

a. Dividends received deduction.
b. Cost recovery deduction.
c. Charitable contributions.
d. Net capital losses.
ANSWER: b
RATIONALE: Each group member may continue to apply the depreciation methods best suited for its
needs.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
75. Which of the following statements is true with regard to intercompany transactions?
a. An intercompany transaction is eliminated from consolidated taxable income.
b. All intercompany gains are recognized, but losses must be deferred.
c. A cash sale of a business asset by the purchasing member to an acquirer outside of the group triggers
immediate recognition of the gain or loss.
d. The gain or loss on an intercompany transaction is deferred for up to ten years, after which it is recognized.
ANSWER: c
RATIONALE: Both gains or losses on intercompany transactions are deferred until a restoration event
triggers the recognition of income.
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-09 - LO: 8-09
OTHER: Time: 5 min.
76. ParentCo purchased all of the stock of ChildCo on January 2, 2015, and the two companies filed consolidated returns
for 2015 and thereafter. Both entities were incorporated in 2014. Taxable income computations for the members include
the following. Neither group member incurred any capital gain or loss transactions during these years, nor did they make
any charitable contributions. No § 382 limit applies.
ParentCo’s ChildCo’s Taxable Consolidated

2014 $100,000 ($ 75,000) N/A
2015 $100,000 ($ 40,000) $60,000
2016 $100,000 $ 10,000 ?
2017 $100,000 $125,000 ?
To what extent can ChildCo’s 2014 losses be used by the group in 2017?
a. $135,000
b. $125,000
c. $75,000
d. $10,000
e. $0
ANSWER: c
RATIONALE: The $40,000 2015 ChildCo loss is absorbed in the current year against ParentCo’s income.
Because the 2014 loss arose in a separate return year, its use as a deduction against group
income is limited to the lesser of ChildCo’s current-year or cumulative positive contribution
to consolidated taxable income. For 2015 and 2016, this amount is less than zero. As of 2017,
ChildCo’s cumulative contribution to consolidated taxable income was $95,000 = $40,000
loss for 2015 + 2016’s $10,000 income + 2017’s income of $125,000. Thus, all of the
ChildCo 2014 separate return year $75,000 loss can be deducted against 2017 income.
POINTS: 3
77. ParentCo purchased all of the stock of ChildCo on January 2, 2015, and the two companies filed consolidated returns
for 2015 and thereafter. Both entities were incorporated in 2014. Taxable income computations for the members include
the following. Neither group member incurred any capital gain or loss transactions during these years, nor did they make
any charitable contributions. No § 382 limit applies.
ParentCo’s ChildCo’s Taxable Consolidated

2014 $10,000 ($95,000) N/A
2015 $10,000 $50,000 ?
2016 ($25,000) $40,000 ?
2017 $10,000 $10,000 ?
Assuming that no election is made to forgo the carryback, to what extent are ChildCo’s 2014 losses used by the group in
2015-2017?
a. $100,000
b. $95,000
c. $75,000
d. $0
ANSWER: c
RATIONALE: Losses from ChildCo’s 2014 separate return year limitation return may only be used to the
lesser of ChildCo’s current-year or cumulative positive contribution to consolidated taxable
income. Therefore, $50,000 of ChildCo’s 2014 loss is absorbed in 2015, $15,000 in 2016,
and $10,000 in 2017.
POINTS: 3
OTHER: Time: 5 min.
78. ParentCo and SubCo had the following items of income and deduction for the current year.
ParentCo’s SubCo’s Taxable
Item Taxable Income Income
Income (loss) from Operations $100,000 ($10,000)
§ 1231 Loss (5,000)
Capital Gain 15,000
Charitable Contribution 12,000
Compute ParentCo and SubCo’s taxable income or loss computed on a separate basis.
ParentCo SubCo
a. $85,000 $5,000
b. $85,000 $3,000
c. $85,500 $5,000
d. $85,500 $3,000
e. None of the above.
ANSWER: c
RATIONALE: ParentCo
Income from Operations $100,000
§ 1231 Loss (5,000)
$ 95,000
Charitable Contribution (10% TI limit) (9,500)
ParentCo’s Separate Taxable Income $ 85,500
SubCo
Income from Operations ($10,000)
Capital Gain 15,000
$ 5,000
Charitable Contribution –0–
SubCo’s Separate Taxable Income $ 5,000
Aggregate Separate Taxable Incomes $ 90,500
POINTS: 1
SCPE.HRMY.15.LO: 8-09 - LO: 8-09
Income (loss) from Operations $100,000 ($10,000)
§ 1231 Loss (5,000)
Capital Gain 15,000
Charitable Contribution 12,000
Compute ParentCo and SubCo’s consolidated taxable income or loss.
a. $81,000
b. $88,000
c. $90,000
d. $90,500
ANSWER: c
RATIONALE: Income from Operations ($100,000 – $10,000) $ 90,000
§ 1231 and Capital Gains and Losses [($5,000) + $15,000] 10,000
$100,000
Consolidated Taxable Income $ 90,000
POINTS: 2
SCPE.HRMY.15.LO: 8-09 - LO: 8-09
Income (loss) from Operations $100,000 $10,000
§ 1231 Loss (10,000)
Capital Gain 12,000
Charitable Contribution 20,000 1,000
ParentCo SubCo
a. $81,000 $21,000
b. $81,000 $22,000
c. $70,000 $22,000
d. $70,000 $21,000
ANSWER: a
RATIONALE: ParentCo
§ 1231 Loss (10,000)
$ 90,000
SubCo
Income from Operations $ 10,000
Capital Gain 12,000
$ 22,000
Charitable Contribution (actual payment, no limit) (1,000)
Aggregate Separate Taxable Incomes $102,000
POINTS: 3
SCPE.HRMY.15.LO: 8-09 - LO: 8-09
Income (loss) from Operations $100,000 $10,000
§ 1231 Loss (10,000)
Capital Gain 12,000
a. $91,000
b. $100,800
c. $112,000
d. $122,000
ANSWER: b
RATIONALE: Income from Operations ($100,000 + $10,000) $110,000
§ 1231 and Capital Gains and Losses [($10,000) + $12,000] 2,000
$112,000
Consolidated Taxable Income $100,800
POINTS: 3
SCPE.HRMY.15.LO: 8-09 - LO: 8-09
82. ParentCo and SubCo recorded the following items of income and deduction for the current tax year.

Income (Loss) from Operations $100,000 $20,000
§ 1231 Loss (8,000)
Capital Gain (Loss) (10,000) 14,000
ParentCo SubCo
a. $78,300 $30,600
b. $80,000 $33,000
c. $81,000 $33,000
d. $82,800 $30,600
e. $82,800 $33,000
ANSWER: e
RATIONALE: ParentCo
§ 1231 Loss (8,000)
Capital Loss (can only offset capital gains) –0–
$ 92,000
SubCo
Income from Operations $ 20,000
Capital Gain 14,000
$ 34,000
Charitable Contribution (actual payment) (1,000)
Aggregate Separate Taxable Incomes $115,800
POINTS: 2
SCPE.HRMY.15.LO: 8-09 - LO: 8-09
83. ParentCo and SubCo recorded the following items of income and deduction for the current tax year.
Income (Loss) from Operations $100,000 $20,000
§ 1231 Loss (8,000)
Capital Gain (Loss) (10,000) 14,000
a. $95,000
b. $99,000
c. $104,400
d. $116,000
e. $120,000
ANSWER: c
RATIONALE: Income from Operations ($100,000 + $20,000) $120,000
Net capital gain 4,000
§ 1231 Loss (ordinary) (8,000)
$116,000
Consolidated Taxable Income $104,400
POINTS: 2
SCPE.HRMY.15.LO: 8-09 - LO: 8-09
84. ParentCo’s separate taxable income was $200,000, and SubCo’s was $50,000. Consolidated taxable income before
contributions was $200,000. Charitable contributions made by the affiliated group included $60,000 by ParentCo and
$10,000 by SubCo. Compute the group’s maximum charitable contribution deduction.
a. $70,000
b. $60,000
c. $25,000
d. $20,000
ANSWER: d
RATIONALE: 10% × $200,000. Charitable contributions are a group item.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
85. ParentCo’s separate taxable income was $200,000, and JuniorCo’s was $50,000. Consolidated taxable income before
contributions was $200,000. Charitable contributions made by the affiliated group included $5,000 by ParentCo and
$1,000 by JuniorCo. Compute the group’s maximum charitable contribution deduction.
a. $0
b. $600
c. $6,000
d. $20,000
e. $25,000
ANSWER: c
RATIONALE: 10% × $200,000, but not to exceed the total gifts of $6,000.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
86. JuniorCo sells an asset to SeniorCo at a realized loss. That loss is not recognized by the group in the year of the sale,
because of the:
a. Wash sale rule.
b. Transfer pricing rules.
c. Matching rule.
d. Acceleration rule.
e. None of the above. The group deducts the loss.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
87. SubCo sells an asset to ParentCo at a realized gain. While ParentCo still holds the asset, SubCo leaves the
consolidated group. As a result:
a. The gain never is recognized.
b. SubCo recognizes the gain on its first tax return after leaving the group.
c. The group recognizes the gain, under the related party rules.
d. The group recognizes the gain, under the acceleration rule.
ANSWER: d
POINTS: 2
DIFFICULTY: Easy
OTHER: Time: 5 min.
88. One of the motivations for the consolidated return rules is to discourage conglomerates from trafficking in the
deductible ____________________ of other entities.
ANSWER: losses
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
89. Most of the rules governing the use of consolidated returns are found in tax ____________________, and not the
____________________.
ANSWER: regulations, Code
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
90. Deferring recognition of an intercompany gain is one ____________________ (advantage/disadvantage) of electing to

file consolidated returns.
ANSWER: advantage
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
91. The calendar year parent and affiliates must elect to file on a consolidated basis by ____________________ 15 after
the first consolidated tax year.
ANSWER: March
September (the extended Form 1120 due date)
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
92. A parent-subsidiary controlled group exists where there is ____________________ percent ownership of all of the
affiliates within the group, and there is an identifiable ____________________ corporation.
ANSWER: 80, parent
eighty, parent
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
93. When an affiliated group elects to file Federal consolidated income tax returns, it gives up the ability to claim a
____________________ deduction for distributions of profits paid to other members.
ANSWER: dividends received
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-07 - LO: 8-07
SCPE.HRMY.15.LO: 8-10 - LO: 8-10
OTHER: Time: 2 min.
94. Members of a parent-subsidiary controlled group must share one $40,000 ____________________ for the tax year.
ANSWER: AMT exemption
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-05 - LO: 8-05
OTHER: Time: 2 min.
95. In terms of the consolidated return rules, the Radcliffe Charitable Foundation is a(n) ____________________ entity.
ANSWER: ineligible
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
96. Generally, when a subsidiary leaves an on-going consolidated group, it must wait ____________________ years
before it again can reenter the parent’s consolidated group.
ANSWER: five
5
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
97. Consolidated estimated tax payments must begin for the ____________________ (first, second, etc.) tax year after the
group’s election.
ANSWER: third
3rd
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
98. All members of an affiliated group have ____________________ and ____________________ liability for each
other’s Federal income tax liabilities.
ANSWER: joint, several
several, joint
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-05 - LO: 8-05
OTHER: Time: 2 min.
99. Consolidated return members determine which affiliates will pay how much of the annual Federal income tax liability
by making a(n) ____________________ election.
ANSWER: tax-sharing
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-05 - LO: 8-05
OTHER: Time: 2 min.
100. If, on joining an affiliated group, SubCo has a different tax year than that of ParentCo, SubCo must switch its year-
end to ParentCo’s by the end of the ____________________ (first, second, etc.) tax year after the election to consolidate.
ANSWER: first
1st
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-05 - LO: 8-05
OTHER: Time: 2 min.
101. Within a Federal consolidated income tax group, SubOne ____________________ (can/cannot) use the LIFO
inventory method at the same time that SubTwo uses the FIFO method.
ANSWER: can
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
102. Dividends paid out of a subsidiary’s E & P to the parent cause a ____________________ (positive/negative)
adjustment to the parent’s stock basis of the subsidiary.
ANSWER: negative
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
103. When negative adjustments are made to the stock basis of the subsidiary that exceed the basis as of the beginning of
the tax year, a(n) ____________________ account is created, rather than giving the parent a negative tax basis in the
stock.
ANSWER: excess loss
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
104. If there is a balance in the excess loss account when a subsidiary’s stock is sold, the balance is recognized as
____________________ gain/income.
ANSWER: capital
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
105. The consolidated return rules combine the members’ transactions involving ____________________ items (e.g., §
1231 gain/loss) when computing consolidated taxable income.
ANSWER: group
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-09 - LO: 8-09
OTHER: Time: 2 min.
106. In computing consolidated taxable income, a net capital gain/loss is an example of a(n) ____________________
item.
ANSWER: group
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-09 - LO: 8-09
OTHER: Time: 2 min.
107. In computing consolidated taxable income, the profit/loss from a sale between Subsidiary and Parent is an example
of a(n) ____________________ item.
ANSWER: elimination
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
108. In computing consolidated taxable income, the purchase at a realized gain of a depreciable asset by Subsidiary from
Parent is an example of a(n) ____________________ transaction.
ANSWER: intercompany
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-09 - LO: 8-09
OTHER: Time: 2 min.
109. The ____________________ rules can limit the net operating loss deduction claimed on a Federal consolidated
return.
ANSWER: separate return limitation year
SRLY
§ 382
Section 382
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
110. When both apply, the § 382 NOL limitation rules override the ____________________ limits.
ANSWER: SRLY
Separate return limitation year
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
111. The treatment of group items on a Federal consolidated corporate income tax return ____________________
(always, sometimes, never) results in a reduction of consolidated taxable income.
ANSWER: sometimes
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
112. The domestic production activities deduction (DPAD) of the affiliates is an example of an item that is computed on a
____________________ basis on a Federal corporate income tax consolidated return.
ANSWER: group
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
113. If one member sells an asset with a realized gain to another member of an affiliated group, any gain on the
transaction is not recognized at that time; such a deferral applies the ____________________ rule.
ANSWER: matching
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
114. In the year that the group terminates its consolidation election, a consolidated group’s deferred gain from an
intercompany asset sale between affiliates is recognized in full, under the ____________________ rule.
ANSWER: acceleration
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 2 min.
115. ParentCo’s controlled group includes the following members. ParentCo owns all of the stock in each of the listed
entities. Which entities can join ParentCo in a consolidated return?
∙ SubCoA, a manufacturer incorporated in India.
∙ SubCoB, a U.S. manufacturer.
∙ SubCoC, a U.S. S corporation.
∙ SubCoD, a U.S. partnership.
∙ SubCoE, a U.S. limited liability company (LLC).
∙ SubCoF, a U.S. manufacturer incorporated in Puerto Rico.
∙ SubCoG, a U.S. manufacturer that claims a deduction for its production activities (DPAD).
∙ SubCoH, a U.S. tax-exempt museum.

ANSWER: ParentCo can include only its subsidiaries B and G on a consolidated return. The other
entities are not eligible to file on a consolidated basis.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
116. The Parent consolidated group reports the following results for the tax year. Determine each member’s share of the
consolidated tax liability, assuming that the members all have consented to use the relative taxable income tax-sharing
method. Dollar amounts are listed in millions, and a 35% marginal income tax rate applies to all of the entities.
Parent SubOne SubTwo SubThree Consolidated

Ordinary
$600 $200 $ 60 ($30) $830
income
Capital gain/loss –0– –0– 20 (5) 15
§1231 gain/loss 130 –0– (55) –0– 75
($30), with a $5
Separate taxable
$730 $200 $ 25 capital loss
incomes
carryover
Consolidated
$920
taxable income
Consolidated tax
$322
liability
Energy tax
credit, from (10)
SubOne
Net tax due $312
ANSWER:
Consolidated tax liabilities are shared in the following manner.
Separate Taxable
Allocation Ratio Allocated Tax Due
Income
Parent $730 730/955 $239
SubOne 200 200/955 65
SubTwo 25 25/955 8
SubThree –0– 0 –0–
Totals $955 $312
POINTS: 3
117. The Parent consolidated group reports the following results for the tax year. Determine each member’s share of the
consolidated tax liability, assuming that the members all have consented to use the relative tax liability tax-sharing
method. Dollar amounts are listed in millions, and a 35% marginal income tax rate applies to all of the entities.
Parent SubOne SubTwo SubThree Consolidated

Ordinary
$600 $200 $60 ($30) $830
income
Capital gain/loss –0– –0– 20 (5) 15
§ 1231 gain/loss 130 –0– (55) –0– 75
($30), with a $5
Separate taxable
$730 $200 $25 capital loss
incomes
carryover
Consolidated
$920
taxable income
Consolidated tax
$322
liability
Energy tax
credit, from (10)
SubOne
Net tax due $ 312
ANSWER:
Consolidated tax liabilities are shared in the following manner.
Separate Taxable Separate Tax Allocation Allocated

Income Liability Ratio Tax Due
Parent $730 $255.5 255.5/324.25 $246
60, after applying
SubOne 200 60/324.25 58
energy tax credit
SubTwo 25 8.75 8.75/324.25 8
SubThree –0– –0– 0 –0–
Totals $955 $324.25 $312
POINTS: 3
118. TopCo owns all of the stock of BottomCo. Both taxpayers are subject to the alternative minimum tax (AMT) this
year for the first time, due to a dependence on accelerated MACRS deductions. The corporations incurred no
intercompany transactions during the year. TopCo has a consolidation election in effect for the group.
If the affiliates were to file separate Forms 1120 this year, the following amounts would be reported.
TopCo’s adjusted current earnings $2,000,000

TopCo’s AMT income before the ACE adjustment 1,200,000
BottomCo’s adjusted current earnings 500,000
BottomCo’s AMT income before the ACE adjustment 1,000,000
a. Compute the ACE adjustment for the consolidated group.
b. Comment on the effects of the consolidation election on the companies’ AMT liabilities.
ANSWER:
.75 × ($2,500,000 Consolidated ACE – $2,200,000 Consolidated Pre-ACE AMTI) =
a.
$225,000 Consolidated ACE adjustment.
When the ACE adjustment is computed on a consolidated basis, BottomCo’s “unused”

excess AMTI is offset against TopCo’s adjusted current earnings, and the aggregate
b.
ACE adjustment is reduced by $375,000 due to the consolidation. To the extent that
this relationship continues, TopCo and BottomCo are attractive consolidation partners.
∙ TopCo’s separate ACE adjustment = $600,000 = .75 × ($2,000,000 – $1,200,000)
BottomCo’s separate ACE adjustment = ($375,000) = .75 × ($500,000 –

∙ $1,000,000), but not usable to reduce AMTI because BottomCo has reported zero
positive ACE adjustments in prior years.
POINTS: 2
SCPE.HRMY.15.LO: 8-05 - LO: 8-05
SCPE.HRMY.15.LO: 8-09 - LO: 8-09
119. Calendar year Parent Corporation acquired all of the stock of SubCo on January 1, Year 1, for $500,000.
The subsidiary’s operating gains and losses are shown below. In addition, a $50,000 dividend is paid early in
Year 2.
Complete the following chart, indicating the appropriate stock basis and excess loss account amounts.
Excess
Operating Stock
Year Loss
Gain/Loss Basis
Account
1 ($100,000) ? ?
2 ($150,000) ? ?
3 $300,000 ? ?
ANSWER: Operating Excess Loss
Year Gain/(Loss) Stock Basis Account
1 ($100,000) $400,000 $0
$200,000, reflecting $50,
2 ($150,000) $0
dividend paid
3 $300,000 $500,000 $0
POINTS: 2
120. LargeCo files on a consolidated basis with LittleCo. The subsidiary was acquired for $400,000 on January 1, Year 1,
and it paid a $75,000 dividend to LargeCo at the end of both Year 2 and Year 3.
a.
Given the following information about the subsidiary’s operating results, derive
the requested amounts as of December 31 of each year. The group files using a
calendar year.
LargeCo’s
LittleCo’s
Investment in LittleCo
Operating Stock Excess Loss
Year Gain/(Loss) Basis Account
1 ($125,000) ? ?
2 ($300,000) ? ?
3 $50,000 ? ?
LargeCo sold LittleCo to an unrelated competitor for $600,000 on December 31, Year 3.
b.
How will LargeCo account for this sale?
ANSWER: a. Year 1 Stock basis $275,000; excess loss account $0
$100,000, reflecting $75,000 dividend
Year 2 Stock basis $0; Excess loss account
paid
$125,000, reflecting $75,000 dividend
Year 3 Stock basis $0; Excess loss account
paid
Capital gain income to the extent of the excess loss account plus the amount realized on
b.
the sale = $725,000.
POINTS: 2
121. In the current year, Parent Corporation provided advertising services to its 100%-owned subsidiary, SubCo, under a
contract that requires no payments to Parent until next year. Both parties use the accrual method of tax accounting and a
calendar tax year. The services that Parent rendered were valued at $250,000. In addition, Parent received $20,000 of
interest payments from SubCo., relative to an arm’s length note between them.
Including these transactions, Parent’s taxable income for the year amounted to $400,000. SubCo reported $200,000
separate taxable income. Derive the group’s consolidated taxable income, using the format of Exhibit 8.3.
Separate Post-
Taxable Adjustment
Income Adjustments Amounts
ParentCo Information
SubCo Information
Group-Basis
Transactions
Intercompany
Events
Consolidated
Taxable Income
NOTES
ANSWER: No eliminating adjustments are required of the group. The members’ deductions incurred
offset the income included by the other party to the intercompany transaction (e.g.,
consolidated taxable income includes both ParentCo’s gross interest income and SubCo’s
deduction therefor), so a financial accounting-style elimination results from the use of the
consolidated taxable income computation itself. The services transaction is reported next year
by both parties, when the services are rendered.
Separate Post-Adjustment
Taxable Income Adjustments Amounts
ParentCo
$400,000 $400,000
Information
SubCo Information
$200,000 $200,000
Group-basis
Transactions
Intercompany
Events
Consolidated
$600,000
Taxable Income
POINTS: 1
OTHER: Time: 5 min.
122. For each of the indicated tax years, compute consolidated taxable income for the calendar year Holloway Group,
which elected consolidated status immediately upon creation of the two member corporations in January 2014. All
recognized income related to the data processing services of the firms. No intercompany transactions were completed
during the indicated years.
Tax Year Holloway Corporation Olson Corporation

2014 $250,000 ($ 70,000)
2015 250,000 (120,000)
2016 250,000 (180,000)
2017 250,000 110,000
ANSWER:
Consolidated taxable income
2014 $180,000
2015 $130,000
2016 $ 70,000
2017 $360,000
The Olson losses offset the Holloway income dollar for dollar, but they do not become large
enough to produce a consolidated loss. Because both corporations produce ordinary income,
there are no adjustments to make using the format of Exhibit 8.3. There are no consolidated
NOL carryovers in any of the specified years.
POINTS: 2
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-07 - LO: 8-07
SCPE.HRMY.15.LO: 8-08 - LO: 8-08
OTHER: Time: 5 min.
123. For each of the indicated tax years. compute consolidated taxable income for the calendar year Whitman Group,
which elected consolidated status immediately upon creation of the two member corporations in January 2014. All
recognized income related to the data processing services of the firms. No intercompany transactions were completed
during the indicated years.
Tax Year Whitman Corporation Draper Corporation

2014 $250,000 $ 90,000
2015 250,000 (170,000)
2016 250,000 (560,000)
2017 250,000 145,000
ANSWER:
It is assumed that the group does not elect to forgo the carryback of the 2016 consolidated net
operating loss.
Consolidated taxable income
2014 $340,000
2015 $ 80,000
2016 $ –0– ($310,000) NOL carryback to generate refund from 2014 group tax liability.
2017 $395,000
POINTS: 2
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-08 - LO: 8-08
OTHER: Time: 5 min.
124. Parent Corporation, SubOne, and SubTwo have filed consolidated returns since 2013. All of the entities were
incorporated in 2012. None of the group members incurred any capital gain or loss transactions during 2012-2015, nor did
they make any charitable contributions. Taxable income computations for the members are listed below.
Parent’s SubOne’s SubTwo’s Consolidated

Taxable Taxable Taxable Taxable
Year Income Income Income Income
2012* $100,000 $100,000 $260,000 N/A
2013** $100,000 $100,000 ($ 60,000) $140,000
2014** $100,000 ($80,000) ($250,000) ?
2015** $100,000 $120,000 $300,000 ?
* Separate return year.
** Consolidated return year.
How much of the 2014 loss is apportioned to SubOne and SubTwo? How is this loss treated in
a.
generating a refund of prior tax payments?
b. Why would Parent consider electing to forgo the carryback of the 2014 consolidated NOL?
c. In this light, analyze the election to consolidate.

ANSWER: a. Lacking an election by ParentCo to forgo the carryback of the 2014 consolidated net
operating loss of $230,000, both subsidiaries can carry losses back to the 2012 separate
return years and receive separate refunds.
∙ SubOne can carry back a $55,758 loss [(SubOne’s NOL $80,000 ÷ Aggregate NOLs
$330,000) × Consolidated NOL $230,000].
∙ SubTwo can carry back a $174,242 loss [($250,000 ÷ $330,000) × $230,000].
SubOne and SubTwo both would file for refunds of taxes that result from the carryback,
and they would receive directly the refunded tax dollars.
b. If ParentCo elected to forgo the carryback of the 2014 consolidated loss, the deduction
therefor would be preserved for subsequent consolidated years. Furthermore, any
resulting tax reduction or refund would be received by ParentCo, presumably to be
shared by the entire electing group, including ParentCo.
c. The election must be analyzed relative to the present value of the tax savings generated
by the purchased NOLs. The longer that one must wait to deduct the NOLs, the lower
their present value, and the less attractive is an election to consolidate.
POINTS: 1
125. The group of Parent Corporation, SubOne, and SubTwo has filed a consolidated return since 2013. The first two
entities were incorporated in 2012, and SubTwo came into existence in 2013 through an asset spin-off from Parent.
Taxable income computations for the members are shown below. None of the group members incurred any capital gain or
loss transactions during 2012-2015, nor did they make any charitable contributions.
Describe the treatment of the group’s 2014 consolidated NOL. Hint: Apply the offspring rule.
Parent’s SubOne’s SubTwo’s Consolidated

Taxable Taxable Taxable Taxable
Year Income Income Income Income
2012* $200,000 $ 70,000 - $270,000
2013* $ 90,000 $ 20,000 ($ 40,000) $ 70,000
2014* $ 90,000 ($ 80,000) ($ 40,000) ?
2015* $ 90,000 $100,000 $210,000 ?
* Consolidated return year.
ANSWER: Lacking an election by ParentCo to forgo the carryback of the 2014 consolidated net
operating loss of $30,000, SubOne can carry back to 2012 its $20,000 apportioned loss
($80,000/$120,000 × $30,000 group NOL), to be deducted against previously computed
consolidated taxable income.
SubTwo’s $10,000 share of the loss also can be carried back to 2012 and used by the
consolidated group. Under the Offspring Rule, SubTwo is treated as being a member of the
group for the entire group carryback period, because its existence is rooted in ParentCo’s
assets.
POINTS: 1
126. Parent Corporation’s current-year taxable income included $100,000 net profit from operations and a $30,000 net
long-term capital gain. Parent also made a $22,000 contribution to State University. SubCo produced $85,000 of income
from operations and incurred a $25,000 net short-term capital loss.
Use the computational worksheet of Exhibit 8.3 to derive the group members’ separate taxable incomes and the group’s
Separate Post-
Taxable Adjustment
Income Adjustments Amounts
ParentCo Information
SubCo Information
Group-Basis
Transactions
Intercompany
Events
Consolidated
Taxable Income
NOTES
ANSWER: ParentCo’s separate taxable income amounts to $117,000.
Income from operations $100,000

Capital gain income 30,000
Less: Charitable contribution (10% TI limit) (13,000)
Separate taxable income $117,000
SubCo’s separate taxable income was $85,000, because the net capital loss is not deductible.
Thus, the aggregate separate taxable incomes for the group amounted to $202,000.
Upon consolidation, a greater amount of ParentCo’s charitable contribution becomes
deductible, and its capital gain is sheltered from current-year tax by SubCo’s net capital loss.
The group holds a $3,000 charitable contribution carryforward. Aggregate taxable income is
reduced by $31,000.
Separate Post-
Taxable Adjustment
Income Amounts
Adjustments
– $30,000 capital gain income**
ParentCo Information $117,000 + $13,000 charitable contribution $100,000
deduction**
SubCo Information $ 85,000 $25,000 short-term capital loss** $ 85,000
$5,000 net long-term capital gain
Group-Basis – $22,000 charitable contribution $ 5,000
Transactions (group’s 10% maximum ($ 19,000)
deduction)**
Intercompany
Events
Consolidated
$171,000
Taxable Income
NOTES
* Permanent Eliminations
** Group-Basis Transaction
† Matching Rule
POINTS: 3
SCPE.HRMY.15.LO: 8-09 - LO: 8-09
127. How many consolidated tax returns are filed annually? What types of taxpayer do they represent?
ANSWER: Of the over 1.6 million corporations filing Forms 1120, fewer than 40,000 file consolidated
Federal income tax returns. These entities represent over 95% of the country’s assets and
sales revenues. Consolidated returns claim virtually all of the allowed foreign tax credits.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
128. List some of the non-tax reasons that groups of corporations form conglomerates and may be eligible also to file
consolidated Federal income tax returns.
ANSWER: Conglomerates are formed to reduce overall tax liabilities, but also to:
∙ isolate the assets of some affiliates from the liabilities of others,
∙ preserve intangible assets such as trade names,
∙ accomplish estate planning objectives, and
∙ expand into global markets.

POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-03 - LO: 8-03
OTHER: Time: 5 min.
129. Where are the controlling Federal income tax rules regarding consolidated tax returns to be found? What is the
general philosophy of those rules? Do they tend to be pro- or anti-taxpayer?
ANSWER: Most of the rules controlling the use of consolidated Federal tax returns are found in the
extensive Regulations under IRC §§ 1501-1504. The rules are designed to limit the tax
advantages that otherwise might be available to affiliated groups of corporations. The
Treasury seems to want to discourage profitable corporations from “trafficking” in the shares
of businesses that generate deductible net losses and tax credits.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
130. The consolidated income tax return rules apply only for Federal tax purposes. Financial accounting rules can be quite
different from the corresponding tax rules, but the tax professional should be familiar with both sets of requirements.
Describe the major differences between the book and tax treatment for the conglomerate’s reporting of:
a. The ownership levels required to consolidate.
b. Goodwill.
c. The entities included on the report.

ANSWER: Generally, GAAP consolidation is mandatory when greater than 50% ownership is
a.
attained. Tax consolidation is elective when 80% or greater ownership is attained.
For financial accounting purposes, goodwill is not amortized, but if the value of the
goodwill changes during the year, the impairment (a decrease in the value of the
b. goodwill, an expense item) or the reversal of a prior impairment (a revenue item) is
recorded on the income statement. Under the tax rules, purchased goodwill is amortized
over 15 years.
A Federal consolidated tax return includes only U.S. corporations. Non-U.S. and non-
c.
corporate entities can be included in the conglomerate’s financial statements.
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-04 - LO: 8-04
KEYWORDS: Bloom's: Analysis
OTHER: Time: 5 min.
131. Outline the major advantages and disadvantages of filing Federal corporate income tax returns on a consolidated
basis. Limit your comments to the income tax effects of the election.
ANSWER: Assessing only the Federal income tax aspects of the consolidation election, the major
advantages include the following.
Application of operating and capital losses of one member against the
∙
gains/income of others
∙ Elimination of all tax liabilities on intercompany dividends
∙ Deferral of gains from certain intercompany transactions
∙ Optimization of the group’s § 199 domestic production activities deduction
Optimization of other deductions, losses, and credits computed on a

∙
group basis
∙ Optimization of the group’s AMT attributes
∙ Optimization of the group’s estimated tax payments
Creation of basis in subsidiary stock when net gains are recognized by the
∙
group
Major Federal income tax disadvantages relative to the consolidation election include the
following.
The binding status of the election, and the five-year cooling-off period
∙
after termination thereof
∙ Deferral of losses from certain intercompany transactions
Loss of basis in subsidiary stock when net losses are recognized by the
∙
group
Standardization of the tax year, perhaps resulting in income bunching and

∙
loss of flexibility
Additional costs incurred to meet compliance and administrative

∙
requirements, which can be burdensome
POINTS: 1
DIFFICULTY: Easy
132. The U.S. states apply different rules in treating Federal consolidated groups for corporate income tax purposes.
Describe at least three different approaches that the states currently use to allow or restrict conglomerates’ use of
consolidations.
ANSWER: Various states apply a number of different approaches to treating Federal consolidated
groups that do business in the state. These currently include:
∙ Allowing the Federal group to elect to consolidate
Allowing any member of a Federal controlled group with nexus to the state
∙
to consolidate
∙ Allowing consolidation only with specific state approval
Allowing consolidation only for entities that generate net taxable income in
∙
the state
∙ Requiring a separate state election to consolidate
∙ Not allowing consolidation, such that all corporations file separate returns
∙ Limiting the election to members of a unitary filing group of affiliates
Allowing taxpayers in certain industries to apply special rules in computing
∙
consolidated taxable income
POINTS: 1
DIFFICULTY: Easy
133. Consider AB, a brother-sister group of U.S. corporations, and CD, a parent-subsidiary group of U.S. corporations.
Which of these could comprise a controlled group? An affiliated group?
ANSWER: Either group could be a controlled group, depending on various ownership rules. Only CD
could be an affiliated group, wherein a parent corporation must be identified.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
134. Certain business entities are ineligible to join an affiliated group and file a consolidated Federal income tax return.
List three or more entities that cannot be part of a Federal consolidated tax return group.
ANSWER: These are some of the entities ineligible for membership in a consolidated group.
∙ Non-U.S. entities
∙ Tax exempt entities
∙ Insurance companies
∙ Partnerships, trusts, estate, and limited liability entities
∙ Any non-corporate entity

POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
135. When a corporate group elects to file Federal income tax returns on a consolidated basis, it is subject to several tax
return filing requirements for its first and subsequent tax years. List the most important of those requirements.
ANSWER: The major filing requirements for a Federal consolidated group include the following.
∙ File the Form 1120 using consolidated taxable income.
File Form 1122 listing the group members consenting to the election to
∙
consolidate, with the first consolidated return.
File Form 851, another less-detailed listing of the affiliates joining the
∙
return, with all subsequent consolidated 1120s.
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-05 - LO: 8-05
OTHER: Time: 5 min.
136. Gold and Bronze elect to form a Federal consolidated group. Gold, the parent entity, uses a calendar tax year, while
Bronze’s tax year ends on March 31. Which tax year(s) does the new consolidated group use?
ANSWER: Affiliates must switch to the parent’s tax year, but they can continue to use their existing tax
accounting methods. Often, a short tax year is created when a new affiliate joins the parent’s
group.
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-05 - LO: 8-05
OTHER: Time: 5 min.
137. Gold, Silver, and Bronze constitute a Federal consolidated tax return group. Which of the members is responsible to
pay the tax liability—the parent, the subsidiaries, or both? How are these tax-payable amounts determined? Hint: Use the
term tax-sharing agreement in your answer.
ANSWER: All affiliates are responsible for the total Federal corporate income tax liability of the group,
on a joint and several basis. This rule applies to income tax penalties and interest, as well as
to any tax audit settlements that are completed during the year.
Starting with the third tax year of an electing consolidated group, estimated income tax
payments are made on a consolidated basis.
In assigning shares of the total Federal corporate income tax liability among group members,
say for purposes of computing an affiliate’s E & P balance, the “relative taxable income” and
“relative tax liability” methods often are used. Other methods also are allowed by the
regulations.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
138. Discuss how a parent corporation computes its stock basis for a subsidiary that joins in a Federal consolidated
income tax return.
ANSWER: The initial basis of the subsidiary is recorded at its acquisition price. If the acquisition takes
place as part of a tax-deferred reorganization (see Chapter 7), the amount may be computed
as a carryover or substituted basis. The basis is adjusted for the operations of the group. For
instance, stock basis is increased by the following items.
∙ An allocable share of consolidated taxable income.
An allocable share of the unused portion of the subsidiary’s NOL or net

∙
capital loss.
Negative adjustments to stock basis include the following.
∙ An allocable share of a negative consolidated taxable income.
Dividends paid by the subsidiary to the parent out of subsidiary earnings

∙
and profits.
∙ An allocable share of deductible carryover NOLs and net capital losses.

The parent must maintain detailed documentation as to the stock basis of each of its
subsidiaries.
POINTS: 1
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-10 - LO: 8-10
139. Parent’s basis in the stock of Child, its subsidiary, is $1 million at the beginning of the year. Child’s share of
consolidated taxable income this year is a $1.25 million operating loss. Parent’s basis in the Child stock now is zero.
Explain.
ANSWER: The parent’s tax basis in the stock of the subsidiary cannot be a negative amount. If
excessive taxable losses are incurred to the point that stock basis is zero, the tax law might
hold that no further losses can be deducted. This is the case with flow-through losses of an S
corporation or partnership.
The consolidated return rules do not work this way. Subsidiary losses can continue to be
deducted, and an excess loss account is generated to account for these amounts. If the
parent disposes of the subsidiary stock when an excess loss account exists, capital gain is
reported by the parent to the extent of its balance.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
140. Describe the general computational method used by a Federal consolidated group in computing taxable income.
ANSWER: Consolidated taxable income is determined in the following manner.
∙ Taxable income is computed for each group member on a separate basis.
Certain transactions are accounted for on a group basis, using group

∙ floors, ceilings, and other computational limits. These items include capital
gain/loss and charitable contributions.
Realized gain/losses from most intercompany transactions are deferred

∙
until later tax years.
A few intercompany transactions (such as dividend payments) are

∙
eliminated from all computations of taxable income.
POINTS: 1
DIFFICULTY: Easy
141. ParentCo owns all of the stock of both SubOne and SubTwo. List three “intercompany transactions” that might occur
among the three members of the consolidated filing group.
ANSWER: Illustrative intercompany transactions include the following.
∙ SubOne purchases accounting and data processing services from Parent.
∙ SubTwo pays a regular cash dividend to Parent.
∙ SubOne pays a regular dividend to Parent, using an asset with a realized gain to SubOne.
∙ Parent sells to SubTwo an asset with a realized loss to Parent.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
142. A Federal consolidated group reports a net operating loss for the year. How is this amount allocated to the various
group members? Why is this allocation important?
ANSWER: Each year, the total consolidated loss is allocated as follows.
Member’s separate NOL

Consolidated NOL × = Member’s apportioned NOL
Members’ aggregate NOLs
This allocation of a consolidated operating loss among the affiliates is important when an
affiliate is disposed of or leaves the group. In such cases, it takes its share of the loss to its
next tax return.
POINTS: 1
DIFFICULTY: Easy
OTHER: Time: 5 min.
143. The consolidated tax return regulations use “SRLY” limitations with respect to losses of a subsidiary that can be
deducted on the consolidated return. Describe the various SRLY rules that might apply to a consolidated group member’s
losses.
ANSWER: The SRLY limits generally work this way.
Loss Year Deduction Year Applicable Rules
Regular NOL rules—Carryback 2
Consolidated Consolidated years, carryforward 20 years. Can
elect to forego carryback.
Carryback/forward only the member’s
apportioned loss to its separate return.
Consolidated Separate Departing member takes its
apportioned loss with it to the separate
return.
New member’s NOL carryforward is
available to the group only to the
extent of the new member’s
Separate Consolidated
cumulative positive contribution to
consolidated taxable income. Section
382 rules also may apply.
POINTS: 1
144. The “SRLY” and § 382 limitation rules for Federal consolidated tax returns are designed to keep corporations from
“trafficking” their net operating losses. These rules are restrictive and somewhat complex. Explain why these rules exist,
and how they interact if both apply in the same tax year.
ANSWER: The separate return limitation rule (SRLY) rules are designed to keep Federal consolidated
return members from acquiring new affiliates chiefly to obtain tax loss and credit carryovers.
When, for instance, an NOL is carried forward from a separate return year onto a
consolidated return that now includes an acquired loss corporation, the consolidated return
can include the loss corporation’s loss from pre-consolidation (separate-return) years only to
the extent of the lesser of its (1) current-year, or (2) cumulative positive contribution to
The SRLY rules never apply to the consolidated group’s parent corporation. When both the
SRLY rules apply and there is a § 382 limitation on carryovers, the § 382 rules prevail.
POINTS: 1
145. Certain tax return items are computed on a group basis when a Federal consolidated return election is in place. List
five or more of these group-basis items.
ANSWER: The following items are among those that are computed on a group basis for a Federal
corporate consolidated income tax return.
∙ Net long-term capital gain/loss
∙ Net short-tem capital gain/loss
∙ § 1231 gain/loss
∙ AMT adjustments and preferences
∙ Domestic production activities deduction
∙ Casualty/theft gain/loss
∙ Charitable contributions
∙ Dividends received deduction
∙ Net operating loss
POINTS: 1
146. Gold, Silver, and Tin are the affiliates in a Federal consolidated group. Each of the members conducts traditional
manufacturing activities. Is a domestic production activities deduction (DPAD) available to the group members? Explain.
ANSWER: The § 199 deduction is computed for the expanded affiliated group (EAG). The DPAD is
computed on the basis of the EAG’s consolidated taxable income; it is not the sum of the
affiliates’ separate DPADs. The taxable income and W-2 wages limitations also are used for
the EAG. The DPAD then is allocated to the group members based on the relative amounts of
their qualified production activities income (QPAI).
POINTS: 1
DIFFICULTY: Easy
147. Members of the ABCD Federal consolidated group conduct various transactions with each other during the tax year.
These include the purchase/sale of land and depreciable assets, the licensing of intangible assets, and the conduct of
service arrangements. How does the tax law account for these intercompany items? In your answer, be sure to use the
terms matching rule and acceleration rule at least once each.
ANSWER: Gain or loss realized on property transactions between affiliates may not be recognized
immediately. If more than one tax year is involved, the recognized gain or loss is deferred
under the matching rule until the sold asset leaves the affiliated group, i.e., by a subsequent
sale to a non-affiliated third party. This prevents group members from manipulating
consolidated taxable income merely by moving assets among the members.
The acceleration rule works with respect to a deferred gain/loss when one of the affiliates
involved in the transaction leaves the group, or if the consolidation election is terminated. At
that time, full gain or loss recognition is triggered.
POINTS: 1
148. Forming a Federal consolidated tax return group is a discretionary action by eligible affiliates. List several tax
attributes and situations that might make a subsidiary an attractive partner for a parent corporation on a consolidated
return.
ANSWER: Taxpayers should optimize their overall tax benefits when choosing consolidated return
partners. Within the limitations of the Code and of the non-tax parameters of the
corporation’s business, target corporations might include those with appropriate amounts of
the following.
∙ Loss and credit carryovers
∙ Passive activity income, losses, and credits
∙ Gains that can be deferred through intercompany sales
∙ Contributions to corporate ACE adjustments
∙ Excess limitation amounts (e.g., concerning charitable contributions).
∙ Section 1231 gains, losses, and look-back profiles.

POINTS: 1
Match each of the following terms with the appropriate description, in the context of a consolidated Federal income tax
return.
a. Advantage of consolidating
b. Disadvantage of consolidating
c. Neither an advantage nor a disadvantage
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-05 - LO: 8-05
OTHER: Time: 2 min.
149. Tax compliance deadlines and recordkeeping

ANSWER: b
POINTS: 1
150. Offsetting gains against other members’ losses

ANSWER: a
POINTS: 1
151. Loss deferral on intercompany transactions

ANSWER: b
POINTS: 1
152. Gain deferral on intercompany transactions

ANSWER: a
POINTS: 1
153. A new affiliate uses the LIFO method for inventories

ANSWER: c
POINTS: 1
154. Binding nature of election over multiple tax years

ANSWER: b
POINTS: 1
155. Tax treatment of operating losses when the basis of the payor’s stock is zero
ANSWER: b
POINTS: 1
156. Joint and several liability for Federal income tax

ANSWER: b
POINTS: 1
157. Choice of tax year-ends by affiliates

ANSWER: b
POINTS: 1
Match each of the following items with the appropriate description, indicating whether the item increases or decreases
the parent’s basis in the stock of a subsidiary.
a. Increases stock basis of subsidiary
b. Decreases stock basis of subsidiary
c. No effect on stock basis of subsidiary
DIFFICULTY: Easy
OTHER: Time: 2 min.
158. Member’s operating loss

ANSWER: b
POINTS: 1
159. Member’s operating loss, when stock basis = $0

ANSWER: c
POINTS: 1
160. Member’s operating gains/profits

ANSWER: a
POINTS: 1
161. Increase in affiliate’s E & P

ANSWER: c
POINTS: 1
162. Dividend paid to parent out of affiliate’s E & P

ANSWER: b
POINTS: 1
163. Member’s capital gain

ANSWER: a
POINTS: 1
Match each of the following items with the appropriate description, indicating whether the item’s treatment for financial
accounting and Federal income tax purposes is the same or not.
a. Tax and book treatment is the same
b. Tax and book treatment differ
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-04 - LO: 8-04
SCPE.HRMY.15.LO: 8-05 - LO: 8-05
OTHER: Time: 2 min.
164. Ownership level of parent at which a subsidiary can join the consolidated group.
ANSWER: b
POINTS: 1
165. Parent owns 100% of a U.S. partnership and wants the entity to join the consolidated group.
ANSWER: b
POINTS: 1
166. Parent owns 100% of a Brazil corporation and wants the entity to join the consolidated group.
ANSWER: b
POINTS: 1
167. Joining the consolidated group is mandatory if ownership requirements are met by the entities.
ANSWER: b
POINTS: 1
168. Sales amounts (after returns and allowances) are combined in the consolidation process.
ANSWER: a
POINTS: 1
Match each of the following items with the appropriate description, indicating whether the item is computed on a group
basis on a consolidated tax return.
a. Group item
b. Not a group item
DIFFICULTY: Easy
SCPE.HRMY.15.LO: 8-06 - LO: 8-06
SCPE.HRMY.15.LO: 8-09 - LO: 8-09
OTHER: Time: 2 min.
169. Compensation deductions
ANSWER: b
POINTS: 1
170. Domestic production activities deduction

ANSWER: a
POINTS: 1
171. Net operating loss

ANSWER: a
POINTS: 1
172. Charitable contributions

ANSWER: a
POINTS: 1
173. Dividends received deduction

ANSWER: a
POINTS: 1
174. Interest income from Detroit School District bonds

ANSWER: b
POINTS: 1
Another random document with
no related content on Scribd:
si proche.
Je répondis:
—Non, ma brave femme; j’attendrai que le docteur vous ait
envoyé la garde.
Et me tournant vers le médecin:
—Envoyez-lui la mère Mauduit. Je la payerai.
—Parfait. Je vous l’envoie tout de suite.
Il me serra la main, sortit; et j’entendis son cabriolet qui s’en allait
sur la route humide.
Je restai seul avec les deux mourantes.
Mon chien Paf s’était couché devant la cheminée noire, et il me
fit songer qu’un peu de feu serait utile à nous tous. Je ressortis donc
pour chercher du bois et de la paille, et bientôt une grande flambée
éclaira jusqu’au fond de la pièce le lit de la petite, qui recommençait
à haleter.
Et je m’assis, tendant mes jambes vers le foyer.
La pluie battait les vitres; le vent secouait le toit; j’entendais
l’haleine courte, dure, sifflante des deux femmes, et le souffle de
mon chien qui soupirait de plaisir, roulé devant l’âtre clair.
La vie! la vie! qu’est-ce que cela? Ces deux misérables qui
avaient toujours dormi sur la paille, mangé du pain noir, travaillé
comme des bêtes, souffert toutes les misères de la terre, allaient
mourir! Qu’avaient-elles fait? Le père était mort, le fils était mort. Ces
gueux passaient pourtant pour de bonnes gens qu’on aimait et qu’on
estimait, de simples et honnêtes gens!
Je regardais fumer mes bottes et dormir mon chien, et en moi
entra soudain une joie sensuelle et honteuse en comparant mon sort
à celui de ces forçats!
La petite fille se mit à râler, et tout à coup ce souffle rauque me
devint intolérable; il me déchirait comme une pointe dont chaque
coup m’entrait au cœur.
J’allai vers elle:
—Veux-tu boire? lui dis-je.
Elle remua la tête pour dire oui, et je lui versai dans la bouche un
peu d’eau qui ne passa point.
La mère, restée plus calme, s’était retournée pour regarder son
enfant; et voilà que soudain une peur me frôla, une peur sinistre qui
me glissa sur la peau comme le contact d’un monstre invisible. Où
étais-je? Je ne le savais plus! Est-ce que je rêvais? quel cauchemar
m’avait saisi?
Était-ce vrai que des choses pareilles arrivaient? qu’on mourait
ainsi? Et je regardais dans les coins sombres de la chaumière
comme si je m’étais attendu à voir, blottie dans un angle obscur, une
forme hideuse, innommable, effrayante, celle qui guette la vie des
hommes et les tue, les ronge, les écrase, les étrangle; qui aime le
sang rouge, les yeux allumés par la fièvre, les rides et les
flétrissures, les cheveux blancs et les décompositions.
Le feu s’éteignait. J’y jetai du bois et je m’y chauffai le dos, tant
j’avais froid dans les reins.
Au moins j’espérais mourir dans une bonne chambre, moi, avec
des médecins autour de mon lit, et des remèdes sur les tables!
Et ces femmes étaient restées seules vingt-quatre heures dans
cette cabane sans feu! râlant sur de la paille!...
J’entendis soudain le trot d’un cheval et le roulement d’une
voiture; et la garde entra, tranquille, contente d’avoir trouvé de la
besogne, sans étonnement devant cette misère.
Je lui laissai quelque argent et je me sauvai avec mon chien; je
me sauvai comme un malfaiteur, courant sous la pluie, croyant
entendre toujours le sifflement des deux gorges, courant vers ma
maison chaude où m’attendaient mes domestiques en préparant un
bon dîner.
Mais je n’oublierai jamais cela et tant d’autres choses encore qui
me font haïr la terre.
Comme je voudrais, parfois, ne plus penser, ne plus sentir, je
voudrais vivre comme une brute, dans un pays clair et chaud, dans
un pays jaune, sans verdure brutale et crue, dans un de ces pays
d’Orient où l’on s’endort sans tristesse, où l’on s’éveille sans
chagrins, où l’on s’agite sans soucis, où l’on sait aimer sans
angoisses, où l’on se sent à peine exister.
J’y habiterais une demeure vaste et carrée, comme une immense
caisse éclatante au soleil.
De la terrasse on voit la mer, où passent ces voiles blanches en
forme d’ailes pointues des bateaux grecs ou musulmans. Les murs
du dehors sont presque sans ouvertures. Un grand jardin, où l’air est
lourd sous le parasol des palmiers, forme le milieu de ce logis
oriental. Un jet d’eau monte sous les arbres et s’émiette en
retombant dans un large bassin de marbre dont le fond est sablé de
poudre d’or. Je m’y baignerais à tout moment, entre deux pipes,
deux rêves ou deux baisers.
J’aurais des esclaves noirs et beaux, drapés en des étoffes
légères et courant vite, nu-pieds sur les tapis sourds.
Mes murs seraient moelleux et rebondissants comme des
poitrines de femmes et, sur mes divans en cercle autour de chaque
appartement, toutes les formes des coussins me permettraient de
me coucher dans toutes les postures qu’on peut prendre.
Puis, quand je serais las du repos délicieux, las de jouir de
l’immobilité et de mon rêve éternel, las du calme plaisir d’être bien,
je ferais amener devant ma porte un cheval blanc ou noir aussi
souple qu’une gazelle.
Et je partirais sur son dos, en buvant l’air qui fouette et grise, l’air
sifflant des galops furieux.
Et j’irais comme une flèche sur cette terre colorée qui enivre le
regard, dont la vue est savoureuse comme un vin.
A l’heure calme du soir, j’irais, d’une course affolée, vers le large
horizon que le soleil couchant teinte en rose. Tout devient rose, là-
bas, au crépuscule: les montagnes brûlées, le sable, les vêtements
des Arabes, les dromadaires, les chevaux et les tentes.
Les flamants roses s’envolent des marais sur le ciel rose; et je
pousserais des cris de délire, noyé dans la roseur illimitée du
monde.
Je ne verrais plus, le long des trottoirs, assourdi par le bruit dur
des fiacres sur les pavés, des hommes vêtus de noir, assis sur des
chaises incommodes, boire l’absinthe en parlant d’affaires.
J’ignorerais le cours de la Bourse, les événements politiques, les
changements de ministère, toutes les inutiles bêtises où nous
gaspillons notre courte et trompeuse existence. Pourquoi ces
peines, ces souffrances, ces luttes? Je me reposerais à l’abri du
vent dans ma somptueuse et claire demeure.
J’aurais quatre ou cinq épouses en des appartements discrets et
sourds, cinq épouses venues des cinq parties du monde, et qui
m’apporteraient la saveur de la beauté féminine épanouie dans
toutes les races.
Le rêve ailé flottait devant mes yeux fermés, dans mon esprit qui
s’apaisait, quand j’entendis que mes hommes s’éveillaient, qu’ils
allumaient leur fanal et se mettaient à travailler à une besogne
longue et silencieuse.
Je leur criai:
—Que faites-vous donc?
Raymond répondit d’une voix hésitante:
—Nous préparons des palangres parce que nous avons pensé
que monsieur serait bien aise de pêcher s’il faisait beau au jour
levant.
Agay est en effet, pendant l’été, le rendez-vous de tous les
pêcheurs de la côte. On vient là en famille, on couche à l’auberge ou
dans les barques, et on mange la bouillabaisse au bord de la mer, à
l’ombre des pins dont la résine chaude crépite au soleil.
Je demandai:
—Quelle heure est-il?
—Trois heures, monsieur.
Alors, sans me lever, allongeant le bras, j’ouvris la porte qui
sépare ma chambre du poste d’équipage.
Les deux hommes étaient accroupis dans cette sorte de niche
basse que le mât traverse pour venir s’emmancher dans la
carlingue, dans cette niche si pleine d’objets divers et bizarres qu’on
dirait un repaire de maraudeurs où l’on voit suspendus en ordre, le
long des cloisons, des instruments de toute sorte, scies, haches,
épissoires, des agrès et des casseroles, puis, sur le sol entre les
deux couchettes, un seau, un fourneau, un baril dont les cercles de
cuivre luisent sous le rayon direct du fanal suspendu entre les bittes
des ancres, à côté des puits de chaîne; et mes matelots travaillaient
à amorcer les innombrables hameçons suspendus le long de la
corde des palangres.
—A quelle heure faudra-t-il me lever? leur dis-je.
—Mais, tout de suite, monsieur.
Une demi-heure plus tard, nous embarquions tous les trois dans
le youyou et nous abandonnions le Bel-Ami pour aller tendre notre
filet au pied du Drammont, près de l’île d’Or.
Puis quand notre palangre, longue de deux à trois cents mètres,
fut descendue au fond de la mer, on amorça trois petites lignes de
fond, et le canot ayant mouillé une pierre au bout d’une corde, nous
commençâmes à pêcher.
Il faisait jour déjà, et j’apercevais très bien la côte de Saint-
Raphaël, auprès des bouches de l’Argens, et les sombres
montagnes des Maures, courant jusqu’au cap Camarat, là-bas, en
pleine mer, au delà du golfe de Saint-Tropez.
De toute la côte du Midi, c’est ce coin que j’aime le plus. Je
l’aime comme si j’y étais né, comme si j’y avais grandi, parce qu’il
est sauvage et coloré, que le Parisien, l’Anglais, l’Américain,
l’homme du monde et le rastaquouère ne l’ont pas encore
empoisonné.
Soudain le fil que je tenais à la main vibra, je tressaillis, puis rien,
puis une secousse légère serra la corde enroulée à mon doigt, puis
une autre plus forte remua ma main, et, le cœur battant, je me mis à
tirer la ligne, doucement, ardemment, plongeant mon regard dans
l’eau transparente et bleue, et bientôt j’aperçus, sous l’ombre du
bateau, un éclair blanc qui décrivait des courbes rapides.
Il me parut énorme ainsi ce poisson, gros comme une sardine
quand il fut à bord.
Puis j’en eus d’autres, des bleus, des rouges, des jaunes et des
verts, luisants, argentés, tigrés, dorés, mouchetés, tachetés, ces jolis
poissons de roche de la Méditerranée si variés, si colorés, qui
semblent peints pour plaire aux yeux, puis des rascasses hérissées
de dards, et des murènes, ces monstres hideux.
Rien n’est plus amusant que de lever une palangre. Que va-t-il
sortir de cette mer? Quelle surprise, quelle joie ou quelle désillusion
à chaque hameçon retiré de l’eau! Quelle émotion quand on aperçoit
de loin une grosse bête qui se débat en montant lentement vers
nous!
A dix heures nous étions revenus à bord du yacht, et les deux
hommes radieux m’annoncèrent que notre pêche pesait onze kilos.
Mais j’allais payer ma nuit sans sommeil! La migraine, l’horrible
mal, la migraine qui torture comme aucun supplice ne l’a pu faire, qui
broie la tête, rend fou, égare les idées et disperse la mémoire ainsi
qu’une poussière au vent, la migraine m’avait saisi, et je dus
m’étendre dans ma couchette, un flacon d’éther sous les narines.
Au bout de quelques minutes, je crus entendre un murmure
vague qui devint bientôt une espèce de bourdonnement, et il me
semblait que tout l’intérieur de mon corps devenait léger, léger
comme de l’air, qu’il se vaporisait.
Puis ce fut une sorte de torpeur de l’âme, de bien-être
somnolent, malgré les douleurs qui persistaient, mais qui cessaient
cependant d’être pénibles. C’était une de ces souffrances qu’on
consent à supporter, et non plus ces déchirements affreux contre
lesquels tout notre corps torturé proteste.
Bientôt l’étrange et charmante sensation de vide que j’avais dans
la poitrine s’étendit, gagna les membres qui devinrent à leur tour
légers, légers comme si la chair et les os se fussent fondus et que la
peau seule fût restée, la peau nécessaire pour me faire percevoir la
douceur de vivre, d’être couché dans ce bien-être. Je m’aperçus
alors que je ne souffrais plus. La douleur s’en était allée, fondue
aussi, évaporée. Et j’entendis des voix, quatre voix, deux dialogues,
sans rien comprendre des paroles. Tantôt ce n’étaient que des sons
indistincts, tantôt un mot me parvenait. Mais je reconnus que
c’étaient là simplement les bourdonnements accentués de mes
oreilles. Je ne dormais pas, je veillais, je comprenais, je sentais, je
raisonnais avec une netteté, une profondeur, une puissance
extraordinaires, et une joie d’esprit, une ivresse étrange venue de ce
décuplement de mes facultés mentales.
Ce n’était pas du rêve comme avec du haschich, ce n’étaient pas
les visions un peu maladives de l’opium; c’étaient une acuité
prodigieuse de raisonnement, une manière nouvelle de voir, de
juger, d’apprécier les choses et la vie, avec la certitude, la
conscience absolue que cette manière était la vraie.
Et la vieille image de l’Écriture m’est revenue soudain à la
pensée. Il me semblait que j’avais goûté à l’arbre de science, que
tous les mystères se dévoilaient, tant je me trouvais sous l’empire
d’une logique nouvelle, étrange, irréfutable. Et des arguments, des
raisonnements, des preuves me venaient en foule, renversés
immédiatement par une preuve, un raisonnement, un argument plus
forts. Ma tête était devenue le champ de lutte des idées. J’étais un
être supérieur, armé d’une intelligence invincible, et je goûtais une
jouissance prodigieuse à la constatation de ma puissance...
Cela dura longtemps, longtemps. Je respirais toujours l’orifice de
mon flacon d’éther. Soudain, je m’aperçus qu’il était vide. Et la
douleur recommença.
Pendant dix heures, je dus endurer ce supplice contre lequel il
n’est point de remèdes, puis je dormis, et le lendemain, alerte
comme après une convalescence, ayant écrit ces quelques pages,
je partis pour Saint-Raphaël.
Saint-Raphaël, 11 avril.
Nous avons eu, pour venir ici, un temps délicieux, une petite
brise d’ouest qui nous a amenés en six bordées. Après avoir doublé
le Drammont, j’aperçus les villas de Saint-Raphaël cachées dans les
sapins, dans les petits sapins maigres que fatigue tout le long de
l’année l’éternel coup de vent de Fréjus. Puis je passai entre les
Lions, jolis rochers rouges qui semblent garder la ville, et j’entrai
dans le port ensablé vers le fond, ce qui force à se tenir à cinquante
mètres du quai, puis je descendis à terre.
Un grand rassemblement se tenait devant l’église. On mariait là
dedans. Un prêtre autorisait en latin, avec une gravité pontificale,
l’acte animal, solennel et comique qui agite si fort les hommes, les
fait tant rire, tant souffrir, tant pleurer. Les familles, selon l’usage,
avaient invité tous leurs parents et tous leurs amis à ce service
funèbre de l’innocence d’une jeune fille, à ce spectacle inconvenant
et pieux des conseils ecclésiastiques précédant ceux de la mère et
de la bénédiction publique, donnée à ce qu’on voile d’ordinaire avec
tant de pudeur et de souci.
Et le pays entier, plein d’idées grivoises, mû par cette curiosité
friande et polissonne qui pousse les foules à ce spectacle, était venu
là pour voir la tête que feraient les deux mariés. J’entrai dans cette
foule et je la regardai.
Dieu, que les hommes sont laids! Pour la centième fois au moins,
je remarquais au milieu de cette fête que, de toutes les races, la
race humaine est la plus affreuse. Et là dedans une odeur de peuple
flottait, une odeur fade et nauséabonde de chair malpropre, de
chevelures grasses et d’ail, cette senteur d’ail que les gens du Midi
répandent autour d’eux, par la bouche, par le nez et par la peau,
comme les roses jettent leur parfum.
Certes les hommes sont tous les jours aussi laids et sentent tous
les jours aussi mauvais, mais nos yeux habitués à les regarder,
notre nez accoutumé à les sentir, ne distinguent leur hideur et leurs
émanations que lorsque nous avons été privés quelque temps de
leur vue et de leur puanteur.
L’homme est affreux! Il suffirait, pour composer une galerie de
grotesques à faire rire un mort, de prendre les dix premiers passants
venus, de les aligner et de les photographier avec leurs tailles
inégales, leurs jambes trop longues ou trop courtes, leurs corps trop
gros ou trop maigres, leurs faces rouges ou pâles, barbues ou
glabres, leur air souriant ou sérieux.
Jadis, aux premiers temps du monde, l’homme sauvage,
l’homme fort et nu, était certes aussi beau que le cheval, le cerf ou le
lion. L’exercice de ses muscles, la libre vie, l’usage constant de sa
vigueur et de son agilité entretenaient chez lui la grâce du
mouvement qui est la première condition de la beauté, et l’élégance
de la forme que donne seule l’agitation physique. Plus tard, les
peuples artistes, épris de plastique, surent conserver à l’homme
intelligent cette grâce et cette élégance, par les artifices de la
gymnastique. Les soins du corps, les jeux de force et de souplesse,
l’eau glacée et les étuves firent des Grecs de vrais modèles de
beauté humaine; et ils nous laissèrent leurs statues, comme
enseignement, pour nous montrer ce qu’étaient les corps de ces
grands artistes.
Mais aujourd’hui, ô Apollon, regardons la race humaine s’agiter
dans les fêtes! Les enfants, ventrus dès le berceau, déformés par
l’étude précoce, abrutis par le collège qui leur use le corps à quinze
ans en courbaturant leur esprit avant qu’il soit nubile, arrivent à
l’adolescence, avec des membres mal poussés, mal attachés, dont
les proportions normales ne sont jamais conservées.
Et contemplons la rue, les gens qui trottent avec leurs vêtements
sales! Quant au paysan! Seigneur Dieu! Allons voir le paysan dans
les champs, l’homme souche, noué, long comme une perche,
toujours tors, courbé, plus affreux que les types barbares qu’on voit
aux musées d’anthropologie.
Et rappelons-nous combien les nègres sont beaux de forme,
sinon de face, ces hommes de bronze, grands et souples, combien
les Arabes sont élégants de tournure et de figure!
D’ailleurs, j’ai, pour une autre raison encore, l’horreur des foules.
Je ne puis entrer dans un théâtre ni assister à une fête publique.
J’y éprouve aussitôt un malaise bizarre, insoutenable, un
énervement affreux, comme si je luttais de toute ma force contre une
influence irrésistible et mystérieuse. Et je lutte en effet contre l’âme
de la foule qui essaye de pénétrer en moi.
Que de fois j’ai constaté que l’intelligence s’agrandit et s’élève,
dès qu’on vit seul, qu’elle s’amoindrit et s’abaisse dès qu’on se mêle
de nouveau aux autres hommes. Les contacts, les idées répandues,
tout ce qu’on dit, tout ce qu’on est forcé d’écouter, d’entendre et de
répondre agissent sur la pensée. Un flux et reflux d’idées va de tête
en tête, de maison en maison, de rue en rue, de ville en ville, de
peuple à peuple, et un niveau s’établit, une moyenne d’intelligence
pour toute agglomération nombreuse d’individus.
Les qualités d’initiative intellectuelle, de libre arbitre, de réflexion
sage et même de pénétration de tout homme isolé, disparaissent en
général dès que cet homme est mêlé à un grand nombre d’autres
hommes.
Voici un passage d’une lettre de lord Chesterfield à son fils
(1751), qui constate avec une rare humilité cette subite élimination
des qualités actives de l’esprit dans toute nombreuse réunion:
«Lord Macclesfield, qui a eu la plus grande part dans la

préparation du bill, et qui est l’un des plus grands
mathématiciens et astronomes de l’Angleterre, parle ensuite,
avec une connaissance approfondie de la question, et avec
toute la clarté qu’une matière aussi embrouillée pouvait
comporter. Mais comme ses mots, ses périodes et son
élocution étaient loin de valoir les miens, la préférence me fut
donnée à l’unanimité, bien injustement, je l’avoue. Ce sera
toujours ainsi. Toute assemblée nombreuse est foule; quelles
que soient les individualités qui la composent, il ne faut
jamais tenir à une foule le langage de la raison pure. C’est
seulement à ses passions, à ses sentiments et à ses intérêts
apparents qu’il faut s’adresser.
«Une collectivité d’individus n’a plus de faculté de
compréhension, etc...»
Cette profonde observation de lord Chesterfield, observation faite

souvent d’ailleurs et notée avec intérêt par les philosophes de l’école
scientifique, constitue un des arguments les plus sérieux contre les
gouvernements représentatifs.
Le même phénomène, phénomène surprenant, se produit
chaque fois qu’un grand nombre d’hommes est réuni. Toutes ces
personnes, côte à côte, distinctes, différentes d’esprit, d’intelligence,
de passions, d’éducation, de croyances, de préjugés, tout à coup,
par le seul fait de leur réunion, forment un être spécial, doué d’une
âme propre, d’une manière de penser nouvelle, commune, qui est
une résultante inanalysable de la moyenne des opinions
individuelles.
C’est une foule, et cette foule est quelqu’un, un vaste individu
collectif, aussi distinct d’une autre foule qu’un homme est distinct
d’un autre homme.
Une diction populaire affirme que «la foule ne raisonne pas». Or
pourquoi la foule ne raisonne-t-elle pas, du moment que chaque
particulier dans la foule raisonne? Pourquoi une foule fera-t-elle
spontanément ce qu’aucune des unités de cette foule n’aurait fait?
Pourquoi une foule a-t-elle des impulsions irrésistibles, des volontés
féroces, des entraînements stupides que rien n’arrête, et, emportée
par ces entraînements irréfléchis, accomplit-elle des actes qu’aucun
des individus qui la composent n’accomplirait?
Un inconnu jette un cri, et voilà qu’une sorte de frénésie
s’empare de tous, et tous, d’un même élan auquel personne
n’essaye de résister, emportés par une même pensée qui
instantanément leur devient commune, malgré les castes, les
opinions, les croyances, les mœurs différentes, se précipiteront sur
un homme, le massacreront, le noieront sans raison, presque sans
prétexte, alors que chacun, s’il eût été seul, se serait précipité au
risque de sa vie, pour sauver celui qu’il tue.
Et le soir, chacun rentré chez soi, se demandera quelle rage ou
quelle folie l’a saisi, l’a jeté brusquement hors de sa nature et de son
caractère, comment il a pu céder à cette impulsion féroce?
C’est qu’il avait cessé d’être un homme pour faire partie d’une
foule. Sa volonté individuelle s’était mêlée à la volonté commune
comme une goutte d’eau se mêle à un fleuve.
Sa personnalité avait disparu, devenant une infime parcelle d’une
vaste et étrange personnalité, celle de la foule. Les paniques qui
saisissent une armée et ces ouragans d’opinions qui entraînent un
peuple entier, et la folie des danses macabres, ne sont-ils pas
encore des exemples saisissants de ce même phénomène.
En somme, il n’est pas plus étonnant de voir les individus réunis
former un tout que de voir des molécules rapprochées former un
corps.
C’est à ce mystère qu’on doit attribuer la morale si spéciale des
salles de spectacle et les variations de jugement si bizarres du
public des répétitions générales au public des premières et du public
des premières à celui des représentations suivantes, et les
déplacements d’effets d’un soir à l’autre, et les erreurs de l’opinion
qui condamne des œuvres comme Carmen, destinées plus tard à un
immense succès.
Ce que j’ai dit des foules doit s’appliquer d’ailleurs à la société
tout entière, et celui qui voudrait garder l’intégrité absolue de sa
pensée, l’indépendance fière de son jugement, voir la vie, l’humanité
et l’univers en observateur libre, au-dessus de tout préjugé, de toute
croyance préconçue et de toute religion, c’est-à-dire de toute crainte,
devrait s’écarter absolument de ce qu’on appelle les relations
mondaines, car la bêtise universelle est si contagieuse qu’il ne
pourra fréquenter ses semblables, les voir et les écouter sans être,
malgré lui, entamé de tous les côtés par leurs convictions, leurs
idées, leurs superstitions, leurs traditions, leurs préjugés qui font
ricocher sur lui leurs usages, leurs lois et leur morale surprenante
d’hypocrisie et de lâcheté.
Ceux qui tentent de résister à ces influences amoindrissantes et
incessantes se débattent en vain au milieu de liens menus,
irrésistibles, innombrables et presque imperceptibles. Puis on cesse
bientôt de lutter, par fatigue.
Mais un remous eut lieu dans le public, les mariés allaient sortir.
Et soudain, je fis comme tout le monde, je me dressai sur la pointe
des pieds pour voir, et j’avais envie de voir, une envie bête, basse,
répugnante, une envie de peuple. La curiosité de mes voisins
m’avait gagné comme une ivresse; je faisais partie de cette foule.
Pour occuper le reste de ma journée, je me décidai à faire une
promenade en canot sur l’Argens. Ce fleuve, presque inconnu et
ravissant, sépare la plaine de Fréjus des sauvages montagnes des
Maures.
Je pris Raymond, qui me conduisit à l’aviron en longeant une
grande plage basse jusqu’à l’embouchure, que nous trouvâmes
impraticable et ensablée en partie. Un seul canal communiquait avec
la mer, mais si rapide, si plein d’écume, de remous et de tourbillons,
que nous ne pûmes le franchir.
Nous dûmes alors tirer le canot à terre et le porter à bras par-
dessus les dunes jusqu’à cette espèce de lac admirable que forme
l’Argens en cet endroit.
Au milieu d’une campagne marécageuse et verte, de ce vert
puissant des arbres poussés dans l’eau, le fleuve s’enfonce entre
deux rives tellement couvertes de verdure, de feuillages
impénétrables et hauts, qu’on aperçoit à peine les montagnes
voisines; il s’enfonce tournant toujours, gardant toujours un air de lac
paisible, sans jamais laisser voir ou deviner qu’il continue sa route à
travers ce calme pays désert et superbe.
Autant que dans ces plaines basses du Nord, où les sources
suintent sous les pieds, coulent et vivifient la terre comme du sang,
le sang clair et glacé du sol, on retrouve ici la sensation bizarre de
vie abondante qui flotte sur les pays humides.
Des oiseaux aux grands pieds pendants s’élancent des roseaux,
allongeant sur le ciel leur bec pointu; d’autres, larges et lourds,
passent d’une berge à l’autre d’un vol pesant; d’autres encore, plus
petits et rapides, fuient au ras du fleuve, lancés comme une pierre
qui fait des ricochets. Les tourterelles, innombrables, roucoulent
dans les cimes ou tournoient, vont d’un arbre à l’autre, semblent
échanger des visites d’amour. On sent que partout autour de cette
eau profonde, dans toute cette plaine jusqu’au pied des montagnes,
il y a encore de l’eau, l’eau trompeuse endormie et vivante des
marais, les grandes nappes claires où se mire le ciel, où glissent les
nuages et d’où sortent des foules éparses de joncs bizarres, l’eau
limpide et féconde où pourrit la vie, où fermente la mort, l’eau qui
nourrit les fièvres et les miasmes, qui est en même temps une sève
et un poison, qui s’étale, attirante et jolie, sur les putréfactions
mystérieuses. L’air qu’on respire est délicieux, amollissant et
redoutable. Sur tous ces talus qui séparent ces vastes mares
tranquilles, dans toutes ces herbes épaisses grouille, se traîne,
sautille et rampe le peuple visqueux et répugnant des animaux dont
le sang est glacé. J’aime ces bêtes froides et fuyantes qu’on évite et
qu’on redoute; elles ont pour moi quelque chose de sacré.
A l’heure où le soleil se couche, le marais m’enivre et m’affole.
Après avoir été tout le jour le grand étang silencieux, assoupi sous la
chaleur, il devient, au moment du crépuscule, un pays féerique et
surnaturel. Dans son miroir calme et démesuré tombent les nuées,
les nuées d’or, les nuées de sang, les nuées de feu; elles y tombent,
s’y mouillent, s’y noient, s’y traînent. Elles sont là-haut, dans l’air
immense, et elles sont en bas, sous nous, si près et insaisissables
dans cette mince flaque d’eau que percent, comme des poils, les
herbes pointues.
Toute la couleur donnée au monde, charmante, diverse et
grisante, nous apparaît délicieusement finie, admirablement
éclatante, infiniment nuancée, autour d’une feuille de nénuphar. Tous
les rouges, tous les roses, tous les jaunes, tous les bleus, tous les
verts, tous les violets, sont là, dans un peu d’eau, qui nous montre
tout le ciel, tout l’espace, tout le rêve, et où passent des vols
d’oiseaux. Et puis il y a autre chose encore, je ne sais quoi, dans les
marais, au soleil couchant. J’y sens comme la révélation confuse
d’un mystère inconnaissable, le souffle originel de la vie primitive qui
était peut-être une bulle de gaz sortie d’un marécage à la tombée du
jour.
Saint-Tropez, 12 avril.
Nous sommes partis ce matin, vers huit heures, de Saint-
Raphaël, par une forte brise de nord-ouest.
La mer sans vagues dans le golfe était blanche d’écume, blanche
comme une nappe de savon, car le vent, ce terrible vent de Fréjus
qui souffle presque chaque matin, semblait se jeter dessus pour lui
arracher la peau, qu’il soulevait et roulait en petites lames de
mousse éparpillées ensuite, puis reformées tout aussitôt.
Les gens du port nous ayant affirmé que cette rafale tomberait
vers onze heures, nous nous décidâmes à nous mettre en route
avec trois ris et le petit foc.
Le youyou fut embarqué sur le pont, au pied du mât, et le Bel-
Ami sembla s’envoler dès sa sortie de la jetée. Bien qu’il ne portât
presque point de toile, je ne l’avais jamais senti courir ainsi. On eût
dit qu’il ne touchait point l’eau, et on ne se fût guère douté qu’il
portait au bas de sa large quille, profonde de deux mètres, une barre
de plomb de dix-huit cents kilogrammes, sans compter deux mille
kilogrammes de lest dans sa cale et tout ce que nous avons à bord
en gréement, ancres, chaînes, amarres et mobilier.
J’eus bien vite traversé le golfe au fond duquel se jette l’Argens,
et, dès que je fus à l’abri des côtes, la brise cessa presque
complètement. C’est là que commence cette région sauvage,
sombre et superbe qu’on appelle encore le pays des Maures. C’est
une longue presqu’île de montagnes dont les rivages seuls ont un
développement de plus de cent kilomètres.
Saint-Tropez, à l’entrée de l’admirable golfe nommé jadis golfe
de Grimaud, est la capitale de ce petit royaume sarrazin dont
presque tous les villages, bâtis au sommet de pics qui les mettaient
à l’abri des attaques, sont encore pleins de maisons mauresques
avec leurs arcades, leurs étroites fenêtres et leurs cours intérieures
où ont poussé de hauts palmiers qui dépassent à présent les toits.
Si on pénètre à pied dans les vallons inconnus de cet étrange
massif de montagnes, on découvre une contrée
invraisemblablement sauvage, sans routes, sans chemins, même
sans sentiers, sans hameaux, sans maisons.
De temps en temps, après sept ou huit heures de marche, on
aperçoit une masure, souvent abandonnée, et parfois habitée par
une misérable famille de charbonniers.
Les monts des Maures ont, paraît-il, tout un système géologique
particulier, une flore incomparable, la plus variée de l’Europe, dit-on,
et d’immenses forêts de pins, de chênes-lièges et de châtaigniers.
J’ai fait, voici trois ans maintenant, au cœur de ce pays, une
excursion aux ruines de la Chartreuse de la Verne, dont j’ai gardé un
inoubliable souvenir. S’il fait beau demain, j’y retournerai.
Une route nouvelle suit la mer, allant de Saint-Raphaël à Saint-
Tropez. Tout le long de cette avenue magnifique, ouverte à travers
les forêts sur un incomparable rivage, on essaye de créer des
stations hivernales. La première en projet est Saint-Aigulf.
Celle-ci offre un caractère particulier. Au milieu du bois de sapins
qui descend jusqu’à la mer s’ouvrent, dans tous les sens, de larges
chemins. Pas une maison, rien que le tracé des rues traversant des
arbres. Voici les places, les carrefours, les boulevards. Leurs noms
sont même inscrits sur des plaques de métal: boulevard Ruysdaël,
boulevard Rubens, boulevard Van Dyck, boulevard Claude-Lorrain.
On se demande pourquoi tous ces peintres? Ah! pourquoi? C’est
que la Société s’est dit, comme Dieu lui-même avant d’allumer le
soleil: «Ceci sera une station d’artistes!»
La Société! On ne sait pas dans le reste du monde tout ce que ce
mot signifie d’espérances, de dangers, d’argent gagné et perdu sur
les bords de la Méditerranée! La Société! terme mystérieux, fatal,
profond, trompeur.
En ce lieu pourtant, la Société semble réaliser ses espérances,
car elle a déjà des acheteurs, et des meilleurs, parmi les artistes. On
lit de place en place: «Lot acheté par M. Carolus Duran; lot de M.
Clairin; lot de Mlle Croizette, etc.» Cependant... qui sait?... Les
Sociétés de la Méditerranée ne sont pas en veine.
Rien de plus drôle que cette spéculation furieuse qui aboutit à
des faillites formidables. Quiconque a gagné dix mille francs sur un
champ achète pour dix millions de terrains à vingt sous le mètre pour
les revendre à vingt francs. On trace les boulevards, on amène l’eau,
on prépare l’usine à gaz, et on attend l’amateur. L’amateur ne vient
pas, mais la débâcle arrive.
J’aperçois, loin devant moi, des tours et des bouées qui indiquent
les brisants des deux rivages à la bouche du golfe de Saint-Tropez.
La première tour se nomme tour des Sardinaux et signale un vrai
banc de roches à fleur d’eau, dont quelques-unes montrent leurs
têtes brunes, et la seconde a été baptisée Balise de la Sèche à
l’huile.
Nous arrivons maintenant à l’entrée du golfe, qui s’enfonce au
loin entre deux berges de montagnes et de forêts jusqu’au village de
Grimaud, bâti sur une cime, tout au bout. L’antique château des
Grimaldi, haute ruine qui domine le village, apparaît là-bas dans la
brume comme une évocation de conte de fées.
Plus de vent. Le golfe a l’air d’un lac immense et calme où nous
pénétrons doucement en profitant des derniers souffles de cette
bourrasque matinale. A droite du passage, Sainte-Maxime, petit port
blanc, se mire dans l’eau, où le reflet des maisons les reproduit la
tête en bas aussi nettes que sur la berge. En face, Saint-Tropez
apparaît, protégée par un vieux fort.
A onze heures, le Bel-Ami s’amarre au quai, à côté du petit
vapeur qui fait le service de Saint-Raphaël. Seul, en effet, avec une
vieille diligence qui porte les lettres et part la nuit par l’unique route
qui traverse ces monts, le Lion-de-Mer, ancien yacht de plaisance,
met les habitants de ce petit port isolé en communication avec le
reste du monde.
C’est là une de ces charmantes et simples filles de la mer, une
de ces bonnes petites villes modestes, poussées dans l’eau comme
un coquillage, nourries de poissons et d’air marin, et qui produisent
des matelots. Sur le port se dresse en bronze la statue du bailli de
Suffren.
On y sent la pêche et le goudron qui flambe, la saumure et la
coque des barques. On y voit, sur les pavés des rues, briller, comme
des perles, des écailles de sardines, et le long des murs du port le
peuple boiteux et paralysé des vieux marins qui se chauffe au soleil
sur les bancs de pierre. Ils parlent de temps en temps des
navigations passées et de ceux qu’ils ont connus jadis, des grands-
pères de ces gamins qui courent là-bas. Leurs visages et leurs
mains sont ridés, tannés, brunis, séchés par les vents, les fatigues,
les embruns, les chaleurs de l’équateur et les glaces des mers du
Nord, car ils ont vu, en rôdant par les océans, les dessus et les
dessous du monde, et l’envers de toutes les terres et de toutes les
latitudes. Devant eux passe, calé sur une canne, l’ancien capitaine
au long cours qui commanda les Trois-Sœurs, ou les Deux-Amis, ou
la Marie-Louise, ou la Jeune-Clémentine.
Tous le saluent, à la façon des soldats qui répondent à l’appel,
d’une litanie de «Bonjour, capitaine!» modulés sur des tons
différents.
On est là au pays de la mer, dans une brave petite cité salée et
courageuse, qui se battit jadis contre les Sarrazins, contre le duc
d’Anjou, contre les corsaires barbaresques, contre le connétable de
Bourbon, et Charles-Quint, et le duc de Savoie et le duc d’Épernon.
En 1637, les habitants, les pères de ces tranquilles bourgeois,
sans aucun aide, repoussèrent une flotte espagnole; et chaque
année se renouvelle avec une ardeur surprenante le simulacre de
cette attaque et de cette défense, qui emplit la ville de bousculades
et de clameurs, et rappelle étrangement les grands divertissements
populaires du moyen âge.
En 1813, la ville repoussa également une escadrille anglaise
envoyée contre elle.

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ParentCo’s SubCo’s Taxable Consolidated

ParentCo’s SubCo’s Taxable Consolidated

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ParentCo’s SubOne’s Taxable SubTwo’s Taxable Consolidated

ParentCo SubOne SubTwo

ParentCo’s SubOne’s Taxable SubTwo’s Taxable Consolidated

74. Which of the following items is not computed on a consolidated basis?

ParentCo’s ChildCo’s Taxable Consolidated

ParentCo’s ChildCo’s Taxable Consolidated

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ParentCo’s SubCo’s Taxable

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90. Deferring recognition of an intercompany gain is one ____________________ (advantage/disadvantage) of electing to

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∙ SubCoB, a U.S. manufacturer.

∙ SubCoC, a U.S. S corporation.

∙ SubCoD, a U.S. partnership.

∙ SubCoE, a U.S. limited liability company (LLC).

∙ SubCoF, a U.S. manufacturer incorporated in Puerto Rico.

∙ SubCoH, a U.S. tax-exempt museum.

Parent SubOne SubTwo SubThree Consolidated

Parent SubOne SubTwo SubThree Consolidated

Separate Taxable Separate Tax Allocation Allocated

TopCo’s adjusted current earnings $2,000,000

a. Compute the ACE adjustment for the consolidated group.

When the ACE adjustment is computed on a consolidated basis, BottomCo’s “unused”

∙ TopCo’s separate ACE adjustment = $600,000 = .75 × ($2,000,000 – $1,200,000)

BottomCo’s separate ACE adjustment = ($375,000) = .75 × ($500,000 –

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Tax Year Holloway Corporation Olson Corporation

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Tax Year Whitman Corporation Draper Corporation

Parent’s SubOne’s SubTwo’s Consolidated

c. In this light, analyze the election to consolidate.

Parent’s SubOne’s SubTwo’s Consolidated

ANSWER: ParentCo’s separate taxable income amounts to $117,000.

Income from operations $100,000

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∙ preserve intangible assets such as trade names,

∙ accomplish estate planning objectives, and

∙ expand into global markets.

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c. The entities included on the report.