Question

Senior, Ltd., acquires all of the stock of JuniorCo for $30 million at the beginning of...

Senior, Ltd., acquires all of the stock of JuniorCo for $30 million at the beginning of year 1. The group immediately elects to file income tax returns on a consolidated basis. Senior's operations generate a $50 million profit every year. In year 2, JuniorCo pays its parent a $9 million dividend. Operating results for JuniorCo are as follows:

Tax Year Taxable Income (Loss)
1 $4 million
2 (6 million)
3 15 million

Enter your answers in millions. If an amount is zero, enter "0".

a. Compute Senior's basis in the JuniorCo stock as of the end of years 1, 2, and 3. All tax years occur after 2017.

Stock Basis at End of Tax Year
Year 1 $ million
Year 2 $ million
Year 3 $ million

b. Assume the same fact in part (a), except that JuniorCo's tax year 2 produced a $40 million NOL.

Stock Basis at End of Tax Year Excess Loss Account
Year 1 $ million $ million
Year 2 $ million $ million
Year 3 $ million $ million
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Answer #1

As senior Ltd has acquired all of the stock of JuniorCo. All of the profits or losses made my JuniorCo will be of Senior Ltd. Any business transaction between these two companies will not be considered, as JuniorCo is Fully under control of Senior Ltd. As one can not do transaction with himself alone.

On consolidation both the company's profits or losses are added to arrive at taxable income.

A.

Year 1. $30 million + $4 million = $34 million.

Year 2. $30 milion - $6 million - $9 million = $15 million ( intra company transaction is not considered, so $9 million is deducted)

Year 3. $30 million + $15 million = $45 million.

B.

Same as part A, except year 2.

Year 2. $30 million - $40 million - $9 million = (19 million)

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