ParentCo and SubCo Have Filed Consolidated Returns Since Both Entities

question 104

Multiple Choice

ParentCo and SubCo have filed consolidated returns since 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. $$\begin{array} { l c c c } \text { Year } & \begin{array} { c } \text { ParentCo's } \\\text { Taxable Income }\end{array} & \begin{array} { c } \text { SubCo's Taxable } \\\text { Income }\end{array} & \begin{array} { c } \text { Consolidated } \\\text { Taxable Income }\end{array} \\\text { Year 1 } & \$ 100,000 & \$ 35,000 & \$ 135,000 \\\text { Year 2 } & \$ 100,000 & ( \$ 20,000 ) & \$ 80,000 \\\text { Year 3 } & \$ 100,000 & ( \$ 109,000 ) & ? \\\text { Year 4 } & \$ 100,000 & \$ 190,000 & ?\end{array}$$ The year 3 consolidated loss:

• A) Is carried forward to year 4.
• B) Is carried back to year 1 and produces a tax refund.
• C) Can be used only to offset SubCo's future income.
• D) Offsets ParentCo's year 1 income.

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Definitions:

Negligence

Negligence is the failure to take proper care in doing something, leading to damage or injury to another person.

Fictitious Payee Rule

A legal principle stating that if a negotiable instrument is issued to a fictitious payee, it may be treated as payable to bearer, affecting endorsement requirements.

Imposter Rule

A rule that holds that if one obtains a negotiable instrument by impersonating another and endorses it with the impersonated party’s signature, the loss falls on the drawer of the instrument.

Uniform Commercial Code

A comprehensive set of laws governing all commercial transactions in the United States, intended to standardize and simplify transactions across state lines.