Parent Corp owns 100% of Sub Corp. In Year 1, Sub Corp sells land to Parent Corp for $500,000 (Sub's basis was $300,000). In Year 2, Parent Corp sells the land to an unrelated party for $600,000. They file a consolidated return. What is the consolidated gain reported in Year 1 and Year 2?

Answer options:

Year 1: $200,000; Year 2: $100,000

Year 1: $0; Year 2: $100,000

Year 1: $200,000; Year 2: $0

Year 1: $0; Year 2: $300,000

How to approach this question

Intercompany transactions: Defer gain in Year 1. Recognize original deferred gain + new gain in Year 2 (when sold to outsider).

Full Answer

D.Year 1: $0; Year 2: $300,000✓ Correct

Treas. Reg. §1.1502-13. <br/>Year 1: Sub's gain of $200,000 is an intercompany item and is deferred. Consolidated taxable income includes $0 gain. <br/>Year 2: Parent sells outside the group. This triggers the deferred $200,000 gain. Plus Parent has a gain of $100,000 ($600k - $500k basis). Total Consolidated Gain = $300,000.

Common mistakes

Recognizing gain in Year 1.

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