ExpertHard1 markMultiple Choice
CPA · Question 14 · Area II: Entity Tax Compliance
Parent Corp owns 100% of Sub Corp. They file a consolidated return. In Year 1, Parent sells land to Sub for $500,000 (Parent's basis was $300,000). In Year 2, Sub sells the land to an unrelated third party for $600,000. What is the consolidated taxable income effect in Year 1 and Year 2 regarding this transaction?
Parent Corp owns 100% of Sub Corp. They file a consolidated return. In Year 1, Parent sells land to Sub for $500,000 (Parent's basis was $300,000). In Year 2, Sub sells the land to an unrelated third party for $600,000. What is the consolidated taxable income effect in Year 1 and Year 2 regarding this transaction?
Answer options:
A.
Year 1: $200,000 gain; Year 2: $100,000 gain.
B.
Year 1: $0 gain; Year 2: $300,000 gain.
C.
Year 1: $0 gain; Year 2: $100,000 gain.
D.
Year 1: $200,000 gain; Year 2: $300,000 gain.
How to approach this question
Consolidated return rules (IRC §1502): Intercompany transactions are deferred. The gain is realized but not recognized until the asset leaves the group. When Sub sells to outsider, Parent recognizes its deferred gain AND Sub recognizes its own gain.
Full Answer
B.Year 1: $0 gain; Year 2: $300,000 gain.✓ Correct
Year 1: $0 gain; Year 2: $300,000 gain.
Under the consolidated return regulations (Treas. Reg. §1.1502-13), the $200,000 gain on the intercompany sale in Year 1 is deferred. In Year 2, when the land is sold outside the group, the deferred gain is triggered. Sub also recognizes gain of $100,000 ($600k - $500k basis). Total Year 2 gain = $200,000 (Parent's deferred) + $100,000 (Sub's) = $300,000.
Common mistakes
Recognizing the gain in Year 1; forgetting to add the deferred gain to the Year 2 gain.
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