PORTFOLIO

Computation of Consolidated Tax Liability (Portfolio 756)

Tax Management Portfolio, Computation of Consolidated Tax Liability, No. 756-4th, analyzes the problems relating to the computation of tax liability by an affiliated group of corporations filing a consolidated return. Consolidated tax liability is computed in four steps. First, the separate taxable income or loss of each member is determined in accordance with the eliminations and adjustments peculiar to consolidated returns (e.g., intercompany transactions, inventory, etc.). Next, items that were excluded from the computation of separate taxable income are computed on a consolidated basis. Then, consolidated taxable income is determined by adding the results obtained in the first two steps. Finally, the tax is determined on the amount of consolidated income, and reduced by consolidated tax credits.

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DESCRIPTION

Tax Management Portfolio, Computation of Consolidated Tax Liability, No. 756-4th, analyzes the problems relating to the computation of tax liability by an affiliated group of corporations filing a consolidated return. Consolidated tax liability is computed in four steps. First, the separate taxable income or loss of each member is determined in accordance with the eliminations and adjustments peculiar to consolidated returns (e.g., intercompany transactions, inventory, etc.). Next, items that were excluded from the computation of separate taxable income are computed on a consolidated basis. Then, consolidated taxable income is determined by adding the results obtained in the first two steps. Finally, the tax is determined on the amount of consolidated income, and reduced by consolidated tax credits.
This Portfolio discusses and analyzes: (1) the computation of separate taxable income; and (2) the computation of consolidated income items, such as capital gain or loss and §1231 gain or loss. For a discussion of eligibility to file consolidated returns and the scope of the consolidated return regulations, see 754 T.M., Consolidated Returns — Elections and Filing. For an analysis of the concepts involved in the ownership of subsidiary stock within an affiliated group filing consolidated returns, see 755 T.M.,Consolidated Returns — Investment in Subsidiaries. For a discussion of the limitations on a consolidated group's use of losses, see 757 T.M., Consolidated Returns — Limitations on Losses.


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AUTHORS

GEORGE L. WHITE
George L. White, B.A., Holy Cross College (1958); M.B.A., University of Pennsylvania (1960); LL.B., Harvard University (1963); admitted to practice in Massachusetts; Certified Public Accountant, Massachusetts.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

II. Liability for Income Tax

Introductory Material

A. Computation of Separate Taxable Income

1. In General

2. Intercompany Transaction Rules

a. Background

b. Overview

c. Definitional Rules

(1) Intercompany Transactions

(a) In General

(b) Timing of Transactions

(2) Intercompany Items and Corresponding Items

(a) In General

(b) Intercompany Items

(c) Corresponding Items

(i) In General

(ii) Recomputed Corresponding Items

(3) Separate-Entity Treatment of Transactions

(a) In General

(b) Elective Separate-Entity Treatment

(4) Attributes

d. Matching Rule

(1) In General

(2) Attributes

(3) Holding Periods

(4) Timing of Transactions

(a) Treatment of S's Items

(b) Treatment of B's Items

(5) Treatment of S and B as Divisions of Corporation

(6) Conflicts or Allocation of Attributes

(a) Offsetting Amounts

(b) Allocation in Absence of Offset

(7) Special Status Members

(8) Limitation on Exclusion of Intercompany Gain

(a) General Redetermination Rule

(b) Disallowed Amounts

(c) Distributions Under § 311

(d) Certain Intercompany Gains on Member Stock

(e) Other Situations

(9) Timing Rules as Method of Accounting

(10) Reporting Intercompany Transactions on Separate Entity Basis

(11) Multiple Trigger Rule

e. Acceleration Rule

(1) In General

(2) Determination of S's Items

(a) Sales, Exchanges, and Distributions

(b) Other Transactions

(3) Attributes of B

f. Simplification of Inventory Rules

(1) In General

(2) Alternative Inventory Methods

(a) Reasonable Methods

(b) Dollar-Value LIFO Inventory Method Used by B

(i) Increment Averaging Method

(ii) Increment Valuation Method

(c) Dollar-Value LIFO Method Used by S

g. Stock of Group Members

(1) Background

(2) Overview

(3) Intercompany Distributions

(a) Exclusion from Gross Income

(b) Timing of Distributions

(c) Treatment of Distributing Corporation

(d) Treatment of Boot in Intercompany Reorganizations

(e) Issuer's Acquisition of Its Own Stock

(4) Certain Liquidations and Distributions

(a) Problem of Duplicated Gain

(b) Relief

(i) Actual Liquidations Under § 332

(ii) Downstream Mergers

(iii) Deemed Liquidations Under § 338(h)(10)

(iv) Deemed Liquidations in Forward Cash Merger

(v) Spin-offs

(c) Elections

(5) Limitation on Member Gains on Common Parent Stock

(a) Background

(b) Overview

(c) Common Parent Stock

(d) Loss Stock

(e) Waiver of Built-in Loss on P Stock

(f) Gain Stock

(g) Dealers in P Stock

(h) Positions in P Stock

(i) Effective Date

h. Obligations of Group Members

(1) History of Intercompany Obligation Regulations

(a) 1966 Regulations

(b) 1995 Regulations

(c) 1998 Proposed Regulations

(d) 2007 Proposed Regulations

(2) 2008 Regulations

(a) Overview

(b) Definitions

(i) Obligation of Member

(ii) Intercompany Obligation

(iii) Intercompany Transaction

(iv) Nomenclature

(v) Intercompany Item

(vi) Corresponding Item

(c) Deemed Satisfaction and Reissuance: Assignment-and-Extinguishment and Outbound Transactions

(d) Deemed Satisfaction and Reissuance: Inbound Transactions

i. Anti-Avoidance Rules

j. Successor Corporations and Property

k. Nonapplicability of § 362(e)(2) to Intercompany Transactions

B. Consolidated Items

1. Consolidated Net Operating Loss Deduction

a. Computation of Consolidated Net Operating Loss Deduction

b. Consolidated Net Operating Loss Carryovers and Carrybacks

c. Carryovers and Carrybacks to Separate Return Years

(1) In General

(2) Year of Departure from Group

(3) Offspring Rule

(4) Amount of Consolidated Net Operating Loss Attributable to Member

d. Election to Relinquish Carrybacks

(1) In General

(2) Split Election

(3) Special Carryback Periods in Certain Years

e. Section 381(b)(3)

f. Intragroup Reorganizations - Taxable Years

g. Effect of Excluded COD Income on Consolidated Net Operating Loss

2. Consolidated Capital Gain Net Income or Loss

3. Consolidated § 1231 Net Gain or Loss

4. Consolidated Charitable Contributions Deduction

5. Consolidated Dividends-Received Deduction

6. Consolidated § 247 Deduction

7. Consolidated Excluded COD Income

8. Consolidated Domestic Manufacturing Deduction (§ 199)

C. Hedging Transactions

1. Background

2. Proposed Regulations

3. Final Consolidated Group Hedging Regulations

a. Introduction

b. General Rule: The Single-Entity Approach

c. Separate-Entity Election

(1) Effect of Election

(2) Making the Election

d. Examples

e. Identification Requirements

(1) Single-Entity Approach

(2) Separate-Entity Election in Effect

f. Effect of Identification and Failure to Identify

g. Effective Date and Transition Rules

(1) General Rule

(2) Election to Apply the Single-Entity Approach Retroactively

(3) Transitional Identification Rules

(4) Consistency Rules

h. Timing Rules

4. “Regs. § 1.1275-6” Hedges

5. Section 475

III. Alternative Minimum Tax Liability

A. In General

B. Consolidated Returns

1. Treatment of Adjustments and Preferences

2. Rules Relating to Separate Return Limitation Years

3. Carryovers and Carrybacks of Consolidated AMT Items to Separate Return Years

4. Stock Basis Adjustments

5. Consolidated Minimum Tax Credit

6. Allocations in Determining Earnings and Profits

C. Adjusted Current Earnings (ACE) Adjustment

IV. Liability for Penalty Taxes on Undistributed Income

Introductory Material

A. Personal Holding Company Tax

1. Liability for Personal Holding Company Tax Determined on a Consolidated Basis

2. Liability for Personal Holding Company Tax Determined on a Separate Company Basis

a. Ineligible Affiliated Group

b. Excluded Corporations

B. Accumulated Earnings Tax

1. Determination as to Whether Tax Is Imposed

2. Calculation of Tax Liability

3. Common Parent as Agent

V. Consolidated Tax Credits

Introductory Material

A. General Business Credit

B. Foreign Tax Credit

1. In General

2. Limitation on the Foreign Tax Credit

3. Application of the Separate Return Limitation Year Rules

4. Carrybacks and Carryovers to Separate Return Years

C. Overall Foreign Loss


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 T.D. 8295, 1990-1 C.B. 165 Temporary and Final Regulations, Modification of Rules Relating to Intercompany Transactions and Distributions of Property

Worksheet 2 T.D. 8478, 1993-1 C.B. 189 (Deferred Intercompany Transactions)

Worksheet 3 CO-11-91, 1994-1 C.B. 724 (Prop. Regs. on Intercompany Transactions and Related Rules for Consolidated and Controlled Groups)

Worksheet 4 T.D. 8597, 1995-2 C.B. 147 (Intercompany Transactions)

Worksheet 5 T.D. 8598, 1995-2 C.B. 188 (Intercompany Transactions)

Worksheet 6 T.D. 8660, 61 Fed. Reg. 10447 (3/14/96) (Intercompany Transactions)

Worksheet 7 REG-107592–00, 72 Fed. Reg. 55139 (9/28/07) (Intercompany Obligations)

Worksheet 8 Notice 94-49, 1994-1 C.B. 358 (Intercompany Transactions)

Worksheet 9 Rev. Proc. 97-49, 1997-2 C.B. 523 (Procedures to Obtain or Revoke Consent to Elections Under Regs. § 1.1502-13(e)(3))

Worksheet 10 Request for Consent to Treat Some or All Intercompany Transactions on a Separate Entity Basis (Regs. § 1.1502-13(e)(3); Rev. Proc. 97-49, 1997-2 C.B. 523; See also Annual Revenue Procedure Governing Ruling Requests)

Bibliography

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