Question

B.I.G. Corporation sold a plot of undeveloped land to SubCo this year for $100,000. B.I.G. had acquired the land several years ago for $40,000. The consolidated return also reflects the operating results of the parties: B.I.G. generated $130,000 income from operations, and SubCo produced a $20,000 operating loss.

a. Use the computational worksheet of Exhibit 8.3 to derive the group members’ separate taxable incomes and the group’s consolidated taxable income.

b. Same as part (a), except that five years later SubCo sold the land to Outsider Corporation for $130,000, when its operating income totaled $20,000 (exclusive of the sale of the land), and Parent’s operating income amounted to $90,000.

c. Using a 25% combined state and Federal income tax rate and the materials from text Appendix F*, compute the benefit to the group of deferring the gain on the sale of the land. The B.I.G. group uses a 4% after-tax internal rate of return for purposes of this analysis.

* Appendix F contains Present Value of a $1 and Future Value of a $1 Tables.

8-5a. Computational Procedure The remainder of this chapter will follow the computational procedure suggested in Exhibit 8.2. Exhibit 8.3 presents a skeleton worksheet to be used for the procedure in the related examples. More information is added to the worksheet for every additional subsidiary. In each case, the starting point for this procedure is the separate taxable incomes of all of the group mem- bers. Adjustments then are made for group and intercompany items, as indi- cated in the footnotes to the worksheet. Exhibit 8.3. Consolidated Taxable Income Worksheet Separate Tax- able Income Adjustments Post-Adjust- ment Amounts Parent information Subsidiary information Group-basis transactions Intercompany events Consolidated taxable income *Permanent eliminations. *Group-basis transaction. Matching rule.

Answer 1

a. Use the computational worksheet of Exhibit 8.3 to derive the group members’ separate taxable incomes and the group’s consolidated taxable income.

b. Same as part (a), except that five years later SubCo sold the land to Outsider Corporation for $130,000, when its operating income totaled $20,000 (exclusive of the sale of the land), and Parent’s operating income amounted to $90,000.

c. Using a 25% combined state and Federal income tax rate and the materials from text Appendix F*, compute the benefit to the group of deferring the gain on the sale of the land. The B.I.G. group uses a 4% after-tax internal rate of return for purposes of this analysis.

Refer to the below images for more detailed solution with calculations.

Requirement @: This intercompany transaction is subject to the matching role pealized gain is deffered through an elimination in the computation of consolidated staxable income. Bole's $ 60000 gain is recognised when subco later sells the land to outsider- particulars Separate Taxable Income post- Adjustments Adjustments Amounts $ 190000 (20,000) $ 190,000 (20,000) BI-G. information subcou information Group - basis transactions Intercompany events (60000) -$ 60,000 Jain on intercompany . sale to subcot a Consolidated Taxable income NOTES =' +' Matching Role $ 110000

: gain The groop realized result and includes the $30,000 recognized by subco on post -acquisition the land. Deri I particolars Separate Tarable Income post- Adjustments Amounts Adjustments 190000 S0000 $ 90000 Soooo B.I.G- information lub co information Group-basis transactions intercompany events 60000 - $60,000 restore gain on parentco's Sale to sub co 't Consolidated Taxable income → $ 200000 Notes: 't' Matching Role. ③: Given tax rate = 261. (Federal y State) As a group oses = 4% after tar IRR Realtiment © Gain on sale of land = $ 100ooo - $ 40000 = 60000 Taxable income - 60000 (1-0.25) - 45000 After tax gaur = $45000 (at 0.04) 8 46800 After tax IRR Gain when the & 60000 land is by sold to outsider subco. (calculated above) Therefore, the Benekt to the sale of land group of de refring the = 4 13200 [ 60000 gain on & 46800]