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consolidated return regulations in effect for the years in issue
calculate income of each corporation in an affiliated group
separately as a threshold matter and for that purpose treat each
member of a consolidated return as a separate corporation. 1
Peel, 1 Consolidated Tax Returns sec. 1:01, at 1-2 (3d ed. 1992).
In that respect the tax treatment of insurance premiums is
reflected on a separate basis, not on a consolidated basis. HCA,
moreover, operated Parthenon as a separate entity. It was
separately staffed and managed. It maintained its own personnel
files, accounting records, information management system, cash
management system, and banking arrangements.
The consolidated return regulations require that a parent's
basis in the stock of its subsidiary be adjusted on the basis of
the subsidiary's earnings and profits. CSI Hydrostatic Testers,
Inc. v. Commissioner, 103 T.C. 398, 404 (1994), affd. 62 F.3d 136
(5th Cir. 1995). Pursuant to section 1.1502-32(b)(1)(ii), Income
Tax Regs., a positive basis adjustment is to be made in an amount
equal to an allocable part of the undistributed earnings and
profits of a subsidiary for the taxable year. CSI Hydrostatic
Testers, Inc. v. Commissioner, supra at 410. The net positive or
negative adjustment only affects HCA, however, inasmuch as it is
Parthenon's sole stockholder. The basis adjustment does not
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