Question

Clifton Corporation acquired all of the outstanding Gillion stock on January 1, Year 1, for $2,400,000. The parties immediately elected to file consolidated Federal income tax returns. Gillion reported a Year 1 taxable loss of $250,000, but it generated $400,000 taxable income in Year 2 and $180,000 in Year 3. Gillion paid a $100,000 dividend to Clifton in Year 2 and a $300,000 in Year 3.

Compute Clifton's stock basis in Gillion on the last day of each of the indicated tax years.

Year 1: $_________
Year 2: $_________
Year 3: $_________

Answer 1

Year 1: $2,150,000

Year 2: $2,291,600

Year 3: $2,260,320

Step-by-step explanation:

Clifton's stock in Year 1 = $(2,400,000 - 250,000) = $2,150,000

To obtain percentage tax = (250,000 X 100%)/ 2,400,000 = 10.4% = 0.104

In year 2: Tax on $400,000 = $400,000 * 0.104 = $41,600

∴ Clifton's Stock in year 2 = $(2,150,000 + 41,600 + 100,000) = $2,291,600

In year 3: Tax on $180,00 = $180,000 * 0.104 = $18,720

∴ Clifton's stock in year 3 = $(2,291,600 + 18,720 + 300,000) = $2,260,320