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?

Question

Quizplus · Accepted Answer

When Parent sells the land to Subsidiary, a $25,000 gain is realized but it is not included in consolidated taxable income because it is an intercompany transaction. When Subsidiary sells the land to a nonmember, a $50,000 gain is realized and it is a Sec. 1231 gain because the land was used in Subsidiary's trade or business. This $50,000 gain is included in consolidated taxable income. However, since Subsidiary also purchased the land from the parent company, a portion of the gain may be treated as ordinary income due to the related party rules. Assuming no recapture of previously deducted Sec. 1231 losses must occur, the $25,000 gain from Parent and the $50,000 gain from Subsidiary are netted together as a $75,000 Sec. 1231 gain that is included in consolidated taxable income in the year Subsidiary sells the land.

Parent Corporation Sells Land (A Capital Asset) to Subsidiary Corporation