Question

Parent Corporation sells land (a capital asset) to Subsidiary Corporation in an intercompany transaction, realizing a $25,000 gain. Subsidiary uses the land for five years in its trade or business before selling the land to a nonmember of the group in a cash sale in which a $50,000 gain is realized. Which statement is correct?a. A $25,000 capital gain is included in consolidated taxable income when Parent sells the land to Subsidiary Corporation. A $50,000 Sec. 1231 gain is included in consolidated taxable income when Subsidiary sells the land.b. A $25,000 capital gain and a $50,000 Sec. 1231 gain are included in consolidated taxable income when Subsidiary sells the land.c. A $75,000 Sec. 1231 gain ($25,000 from Parent and $50,000 from Subsidiary) is included in consolidated taxable income in the year Subsidiary sells the land (assuming no recapture of previously deducted Sec. 1231 losses must occur).d. None of the above are correct.

Answer 1

Answer: The correct answer is d. None of the above is correct.

Explanation: The intercompany gain realized would be recognized in the parent company's financial statements while at the consolidated position, the gain will be eliminated. For the parent to have recognized a gain on the capital asset, that means the proceed from sale was more than the net book value of the asset. So, there is no consolidated taxable income as regards this gain.

The $50,000 gain will be recognized by the subsidiary since it was sold to a nonmember of the group. However, it will not be nil at the consolidated position because it is not an intercompany transaction.