[YouCanDoIt]

Beckers
CPA-08637
Parent company X and subsidiary company Y file a calendar year consolidated federal income tax return. Company X reported a $120,000 tax loss, which included a $10,000 dividend from Y. Company Y reported $140,000 of taxable income, which included $30,000 of dividends received from less than 20% owned stock investments. Neither company took into account any applicable dividends received deduction. What is the group’s consolidated tax loss for the year.
A. $7,000
B. ($4,000)
C: ($11,000)
D: ($20,000)

Answer: A

Explanation:
Choice “A” is correct. Because X and Y are a consolidated entity, X should not include the $10,000 dividend from Y in its income. This brings X’s loss to $130,000 [($120,000) – $10,000 = ($130,000)]. The consolidated taxable income for the year, prior to consideration of the dividends-received deduction, is then X’s $130,000 loss netted with Y’s $140,000 income, for preliminary taxable income of $10,000. The dividends-received deduction on the $30,000 dividend received by Y is limited by the taxable income limitation to 30 percent of consolidated taxable income before the dividends-received deduction or 30 percent of $10,000, or $3,000. Consolidated taxable income after the dividends-received deduction is therefore $7,000: $10,000 of consolidated taxable income before the dividends-received deduction less the $3,000 dividends-received deduction of $11,000.

Can someone please explain this to me??
I understand X @ $130,000 loss due to inter-co. dividend of $10k (120k + 10k)
Net ($130k) loss against $140k = $10k taxable income (?)
$30k is already included as div. income under Y, and b/c its a less than 20% ownership, we would use 70% for DRD calculation, leaving 30% for taxable div. income.

DRD= Lesser of
(i) .70 ($10,000)= $7,000
(ii) .70 ($30,000) = $21,000

So, we pick (i) @ $7k DRD

OKAY, so I figure
$10k
($7k)
—–
3k taxable income

CONFUSED~~~~~

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[Bourne]

The answer is C………?

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[YouCanDoIt]

So Beckers did this wrong, to be honest, I am not understanding their last couple of sentences of explanation either.

How did you arrive at 11k loss

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[Bourne]

Everywhere I found this question online the answer is C.

Ignore their explanation.

You have a $120,000 loss of which $10,000 is included of a 100% owned sub. So add back the $10,000 to get a $130,000 loss.
You also have company Y with income of $140,000, of which $30,000 dividend is included and received by <20% owned investment.
$30,000*70% = 21,000 DRD
$140,000 – 21,000 DRD = 119,000 taxable income for company Y.
Company Y's taxable income $119,000 – Parent company X's loss $130,000 = (11,000) loss.

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REG- 86
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[Anonymous]

Shouldn't the problem be asking for consolidated tax GAIN for the year, since 10k taxable income – 3k DRD = 7k gain?

And wth does “the $3,000 dividends-received deduction of $11,000” mean?

[Anonymous]

Bourne,

I think they're correct so far as the DRD being limited to 30% of taxable income, or 3k. But there's definitely something wrong with the rest of the problem and/or answer.

[Anonymous]

Oops, I of course meant 70%, or 7k.

[Bourne]

If the DRD causes an NOL then you can use the full 70% deduction on the dividend.

Even if you net the two; (130,000) + 140,000 = 10,000 gain.
Here, the DRD of 30,000 * 70% = 21,000, which would create an NOL, so you can use the full amount.
10,000 gain – 21,000 DRD = (11,000)

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[YouCanDoIt]

so much more clarity and simulation for the brain, THANK YOU SO MUCH !!!!!!!! @bourne and @calv

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[YouCanDoIt]

Just one more question, it might be kind of silly maybe

WHY are we asked to choose lesser of :
i. %(Dividends received income)
ii. %(Taxable income)

I figured we chose the lesser of (i) or (ii) as to avoid dipping into the NOL territory. But then at the same time, its okay to go ahead with (i) if its creating NOL.

AUD - 77
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[Author]

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