Question

ParentCo purchased all 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 includes the following. Neither group member incurred any capital gain or loss transactions during these years, nor did they make any charitable contributions. Assume no § 382 limit applies.

	ParentCo’s	ChildCo’s Taxable	Consolidated
Year	Taxable Income	Income	Taxable Income
Year 1	$100,000	($ 75,000)	N/A
Year 2	$100,000	($ 40,000)	$60,000
Year 3	$100,000	$ 10,000	?
Year 4	$100,000	$125,000	?

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

Answer 1

Answer : Option C , $75,000

Explanation;

The $40,000 Year 2 , Child Co. Loss is taken in the current year against parent cos income. Because in Year 1 loss arose in a separate return year , it is deduct from group income. In year 3 and year 4 this amount is less than zero.

Child Co's Cumulative Contribution to Consolidated taxable income was $95,000= $40,000 loss for Year 2 + Year 3 $10,000 Income + Year 3 $125,000.

The Child Co.Year 1 separate return year $75,000 loss can be deduct against ayear 4 Income.