P, R, and T Corporations have filed a consolidated tax return for a number of years using the calendar year as its tax year. Current plans call for P to purchase all of X Corporation’s stock at the close of business on June 30 of the current year from three individuals. X was created seven years ago and always has been an S corporation using the calendar year as its tax year. The chief financial officer of P comes to your office and makes a number of inquiries about the tax consequences of the acquisition including: Can X retain its S election? If so, does it file a federal income tax return separate from the consolidated group? Does X have to be included in the P-R-T group’s consolidated tax return? Assuming the acquisition takes place as planned, what tax returns are required of the consolidated group and X? What income is included in the pre-affiliation tax return of X (if required) and the consolidated group’s post-acquisition consolidated tax return? Prepare a brief memo for the chief financial officer outlining the answers to these questions and any other questions you feel are relevant.
A partial list of resources includes:
• IRC Sec. 1361(b)
• IRC Sec. 1362(d)(2)
• Reg. Sec. 1.1502-76