Beta Corporation recently purchased 100% of XYZ Corporation stock. You are their CPA. What tax issues need to be addressed before determining whether or not to file a consolidated tax return?

Question

What will be an ideal response?

Answer 1

• Does either Beta or XYZ have losses?
• Does one corporation have capital gains and the other capital losses?
• Have there been transactions between the two companies?
• Would the two companies want to file a consolidated return in future years?
• Does one corporation have Sec. 1231 losses and the other Sec. 1231 gains?
• Will any deductions or credits be reduced if a consolidated return is filed?

If the group members file separate returns, members with NOLs or capital losses must either carry back these losses to earlier years or carry them forward to future years. Although the losses of one group member can offset the profits of another group member when the group files a consolidated return, some important limitations apply to the use of a member corporation's NOL. These limitations prevent one corporation from purchasing another corporation's NOL carryovers to offset its own taxable income or purchasing a profitable corporation to facilitate the use of its own NOL carryovers. If an election is made to file a consolidated return, it is binding on all subsequent tax years unless IRS permission is granted to discontinue the filing or the affiliated group is terminated. Profits and losses on intercompany transactions are deferred until a sale outside the group takes place. One member's Sec. 1231 losses are offset by another member's Sec. 1231 gains instead of being reported as ordinary losses.