ExpertMedium1 markMultiple Choice
CPA · Question 28 · Area II: Entity Tax Compliance
Parent Co. and Sub Co. file a consolidated return. In Year 1, Parent sells land to Sub for $500,000 (Parent's basis $300,000). In Year 3, Sub sells the land to an unrelated party for $600,000. What is the consolidated gain reported in Year 3?
Parent Co. and Sub Co. file a consolidated return. In Year 1, Parent sells land to Sub for $500,000 (Parent's basis $300,000). In Year 3, Sub sells the land to an unrelated party for $600,000. What is the consolidated gain reported in Year 3?
Answer options:
A.
$100,000
B.
$200,000
C.
$300,000
D.
$0
How to approach this question
Intercompany gains are deferred until the asset leaves the group. Year 1: Parent defers $200k gain. Year 3: Sub realizes $100k gain ($600k - $500k). Total Consolidated Gain = Deferred ($200k) + Current ($100k) = $300k.
Full Answer
C.$300,000✓ Correct
C
IRC §1502 regulations. The intercompany gain of $200,000 ($500k - $300k) is deferred in Year 1. In Year 3, when the land leaves the group, the deferred gain is triggered. Sub also recognizes gain of $100,000 ($600k - $500k). Total consolidated gain = $200,000 + $100,000 = $300,000.
Common mistakes
Thinking the gain is taxed in Year 1 or only the Year 3 portion is taxed.
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