The Flying Gator Problem

he Flying Gator Corporation and its 100%-owned subsidiary, T Corporation, have filed consolidated tax returns for many years. Both corporations use the hybrid method of accounting and the calendar year as their tax year. During 2010 (which is the current year for this problem), they report the operating results as listed in Table C:8-2. Note the following additional information:Current Year Operating Results for Flying Gator and T Corporations (ProblemIncome or Deductions Flying Gator T TotalGross receipts $2,500,000 $1,250,000 $3,750,000Cost of goods sold (1,500,000) (700,000) (2,200,000)Gross profit $1,000,000 $ 550,000 $1,550,000Dividends 100,000 50,000 150,000Interest 15,000 15,000Sec. 1231 gain 20,000 20,000Sec. 1245 gain 25,000 25,000Long-term capital gain (loss) (5,000) 6,000 1,000Short-term capital gain (loss) (3,000) (3,000)Total income $1,110,000 $ 648,000 $1,758,000Salaries and wages 175,000 200,000 375,000Repairs 25,000 40,000 65,000Bad debts 10,000 5,000 15,000Taxes 18,000 24,000 42,000Interest 30,000 20,000 50,000Charitable contributions 22,000 48,000 70,000Depreciation (other than that included in cost of goods sold) 85,000 40,000 125,000Other expenses 160,000 260,000 420,000Total deductions $ 525,000 $ 637,000 $1,162,000Separate return taxable income (before the USPAD, NOL ded., and DRD) $ 585,000 $ 11,000 $ 596,000• Flying Gator and T Corporations are the only members of their controlled group.• Flying Gator’s address is 2101 W. University Ave., Gainesburg, FL 32611. Its employer identification number is XXXXX Flying Gator was incorporated on June 11, 1998. Its total assets are $430,000. Flying Gator made estimated tax payments of $150,000 for the consolidated group in the current year. Stephen Marks is Flying Gator’s president.• A $50,000 consolidated NOL carryover from the preceding year is available. The NOL is wholly attributable to Flying Gator.• Flying Gator and T use the first-in, first-out (FIFO) inventory method. T began selling inventory to Flying Gator in the preceding year, which resulted in a $40,700 deferred intercompany profit at the end of the preceding year. Flying Gator is deemed to realize this profit in the current year because it uses the FIFO method. During the current year, T sells additional inventory to Flying Gator, realizing a $300,000 profit. At the end of the current year, Flying Gator holds inventory responsible for $45,100 of this profit.• Flying Gator receives all its dividends from T. T receives all its dividends from a 60%-owned domestic corporation. All distributions are from E&P.• Flying Gator receives all its interest income from T. T pays Flying Gator the interest on March 31 of the current year on a loan that was outstanding from October 1 of the preceding year through March 31 of the current year. Flying Gator and T did not accrue any interest at the end of the preceding year because they use the hybrid method of accounting. T pays $5,000 of its interest expense to a third party.• Officer’s salaries are $80,000 for Flying Gator and $65,000 for T. These amounts are included in salaries and wages in Table C:8-2.• Flying Gator’s capital losses include a $10,000 long-term loss on a sale of land to T in the current year. T holds the land at year-end.• The corporations have no nonrecaptured net Sec. 1231 losses from prior tax years.• T’s Sec. 1245 gains include $20,000 realized on the sale of equipment to Flying Gator at the close of business on September 30 in the current year. The asset cost $100,000 and had been depreciated for two years by T as five-year property under the MACRS rules. T claims nine months of depreciation in the current (second) year. Flying Gator begins depreciating the property in the current year by using the MACRS rules and a five-year recovery period. Flying Gator claims the appropriate first-year MACRS depreciation on the property in the current year but does not elect Sec. 179 expensing and does not claim bonus depreciation.• Qualified production activities income for Flying Gator is $340,000 and for T is $(35,000). The applicable percentage for 2010 is 9%.Determine the consolidated group’s 2010 tax liability. Prepare the front page of the consolidated group’s current year corporate income tax return (Form 1120).

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