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?
A)A $25,000 capital gain is included in consolidated taxable income when Parent sells the land to Subsidiary Corporation. A $50,000 Sec. 1231 gain is included in consolidated taxable income when Subsidiary sells the land.
B)A $25,000 capital gain and a $50,000 Sec. 1231 gain are included in consolidated taxable income when Subsidiary sells the land.
C)A $75,000 Sec. 1231 gain ($25,000 from Parent and $50,000 from Subsidiary)is included in consolidated taxable income in the year Subsidiary sells the land (assuming no recapture of previously deducted Sec. 1231 losses must occur).
D)None of the above are correct.

Question

Quizplus · Accepted Answer

When Parent sells the land to Subsidiary, it realizes a $25,000 gain which must be included in consolidated taxable income. When Subsidiary sells the land to a nonmember of the group, it realizes a $50,000 gain which must also be included in consolidated taxable income. Both of these gains are treated as Sec. 1231 gains because the land was used in a trade or business. Therefore, the correct answer is C, as the total Sec. 1231 gain realized on the sale of the land is $75,000 ($25,000 from Parent and $50,000 from Subsidiary). However, it is important to note that if Subsidiary had any prior Sec. 1231 losses that were recaptured, the amount of gain included in consolidated taxable income would be reduced accordingly.

Parent Corporation Sells Land (A Capital Asset)to Subsidiary Corporation in an Intercompany