ParentCo Purchased All of the Stock of ChildCo on January

question 96

Multiple Choice

ParentCo purchased all of the stock of ChildCo on January 2, Year 2, and the two companies filed consolidated returns for Year 2 and thereafter. Both entities were incorporated in Year 1. 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. $$\begin{array} { l c c c } & \text { ParentCo's } & \text { ChildCo's Taxable } & \text { Consolidated } \\\text { Year } & \text { Taxable Income } & \text { Income } & \text { Taxable Income } \\\text { Year 1 } & \$ 100,000 & ( \$ 75,000 ) & \mathrm { N } / \mathrm { A } \\\text { Year 2 } & \$ 100,000 & ( \$ 40,000 ) & \$ 60,000 \\\text { Year 3 } & \$ 100,000 & \$ 10,000 & ? \\\text { Year 4 } & \$ 100,000 & \$ 125,000 & ?\end{array}$$ To what extent can ChildCo's Year 1 losses be used by the group in Year 4?

• A)$135,000
• B)$125,000
• C)$75,000
• D)$10,000
• E)$0

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Definitions:

Decreases Risk

Involves actions or strategies aimed at reducing the potential for loss or harm in various contexts, such as financial investments, business operations, or personal decisions.

Reduces Liquidity

Refers to any action or situation that decreases the ease with which assets can be converted into cash without significant loss in value.

Divestiture

Sale of assets by a company.

Merger

A corporate strategy of combining two or more companies into a single company in order to enhance competitive advantages or expand market share.