P Corporation owns 100% of S Corporation’s stock, and they have filed consolidated tax returns for several years. P also has owned 49% of T Corporation’s stock for 10 years. On December 31 of the current year (Year 1), P purchases the other 51% of T’s stock for $510,000 cash. T has $160,000 of NOLs it is carrying over on that date. In Year 2, the corporations report taxable profits as follows: P, $400,000; S, $250,000; and T, $90,000. Assume that the long-term tax-exempt federal interest rate is 5%.
a. Determine the amount of T’s NOLs the group can deduct for its Year 2 consolidated taxable income.
b. Assume the same facts as in Part a except P purchases 45% of T’s stock for $450,000 on December 31 of Year 1. Determine the amount of T’s NOLs the group can deduct for its Year 2 consolidated taxable income.