ExpertMedium1 markMultiple Choice
CPA · Question 15 · 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 $150,000 (Parent's basis was $100,000). In Year 3, Sub sells the land to an unrelated third party for $180,000. What is the consolidated gain reported in Year 1 and Year 3?
Parent Corp owns 100% of Sub Corp. They file a consolidated return. In Year 1, Parent sells land to Sub for $150,000 (Parent's basis was $100,000). In Year 3, Sub sells the land to an unrelated third party for $180,000. What is the consolidated gain reported in Year 1 and Year 3?
Answer options:
A.
Year 1: $50,000; Year 3: $30,000
B.
Year 1: $0; Year 3: $30,000
C.
Year 1: $50,000; Year 3: $0
D.
Year 1: $0; Year 3: $80,000
How to approach this question
Intercompany transactions: Defer gain/loss until the asset leaves the group. Year 1: $0 recognized. Year 3: Recognize original deferred gain + new gain.
Full Answer
D.Year 1: $0; Year 3: $80,000✓ Correct
D
Treas. Reg. §1.1502-13. The $50,000 gain on the intercompany sale is deferred. When Sub sells to an outsider in Year 3, the deferred gain is triggered. Total gain = ($150k - $100k deferred) + ($180k - $150k current) = $80,000. All recognized in Year 3.
Common mistakes
Recognizing gain in Year 1; forgetting to include the deferred gain in Year 3.
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