[nalratoss]

Corporations X, Y, and Z are component members of a controlled group of corporations on December 31 of the current year. For the current year, they allocate the taxable income brackets under an apportionment plan as follows:

Corporation X
1/4 of each tax bracket

Corporation Y
1/2 of each tax bracket

Corporation Z
1/4 of each tax bracket

Corporation Y has taxable income of $80,000 for the current year. What is Corporation Y’s income tax liability if the controlled group’s total taxable income is $97,000?

$21,325

Under Sec. 1561(a)(1), component members of a controlled group of corporations are limited to using the taxable income brackets in Sec. 11 as if they were one corporation. Unless the members agree otherwise, the tax brackets are allocated equally. Under the apportionment plan, Y is entitled to 50% of each tax bracket. Y’s income tax is
Tax Brackets 50% Tax
1st $50,000 $25,000 × 15% $ 3,750
Next $25,000 12,500 × 25% 3,125
Remainder 42,500 × 34% 14,450
Total
$21,325
Note that, although each tax bracket is allocated in the same manner here, different allocations are permitted. Since the total taxable income of the controlled group is less than $100,000, no recapture of the tax savings resulting from the 15% and 25% marginal tax brackets occurs. The additional 5% tax will not apply unless the total taxable income of the controlled group exceeds $100,000. The allocation selected by the group is less than optimal since the full amount of the 15% and 25% tax bracket benefits are not used when taxable income is $97,000. The group should consider revising its allocation for the current year.

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Okay here’s my question.

How the hell is the remainder bracket not subject to 50%?

The first and second bracket gets multiplied by 50% because Y gets 1/2 of each bracket. The next bracket according to corporate tax schedule should be 34% covering TI over 75,000 but less than 100,000. Since TI for Y is 80,000, we should time 5,000 (80,000 – 75,000) by 50% to get 2,500. 2,500 should be the base for the remainder of the bracket.

[Anonymous]

Oh wow. This question looks like a pre-test question.

Sorry. I’m unable to be of help.

[Anonymous]

https://www.law.cornell.edu/cfr/text/26/1.1561-2 example 1 shall help you.

For the question you posted here, the percentage for allocation of each component corporation is given and it is a fixed percentage. The controlled group taxable income 97000 tells you that the highest rate will be 34% because it is between 75000 and 100000.
So Y has 50000×50% falls in 15%
25000×50% falls in 25%
and the rest of Y's taxable income (80000-50000×50%-25000×50%) falls in 34%

[Author]

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