a. Determine each corporation’s current year taxable income if they file separate tax returns for the current year — Mobile Newark and Omaha Corporations comprise affiliated group

Mobile, Newark, and Omaha Corporations comprise an affiliated group that has filed separate tax returns prior to the current year. The corporations report the following amounts for the current year:

The corporations have no intercompany transactions, no capital loss carryovers, and no nonrecaptured net Sec. 1231 losses. Ignore the U.S. production activities deduction.

a. Determine each corporation’s current year taxable income if they file separate tax returns for the current year.

b. Determine the group’s current year taxable income if the corporations elect to file a consolidated tax return.

SOLUTION

a. Taxable income is $305,100 for Mobile, $195,800 for Newark, and $100,000 for Omaha, calculated as follows:

Mobile: Net Sec. 1231 gain = $6,000 = $18,000 - $12,000; treated as a long-term capital gain under the Sec. 1231 rules

Capital gain net income = $5,100 = $3,500 - $2,000 + $0 - $2,400 +$6,000 Taxable income = $305,100 = $300,000 + $5,100

Newark: Net Sec. 1231 loss = ($5,000) = $9,000 - $14,000; treated as an ordinary loss under the Sec. 1231 rules