Blair and Cannon Corporations are the two members of an affiliated group.No prior net Sec.1231 losses have been reported by any group member.The two corporations report consolidated ordinary income of $100,000 and gains and losses from property transactions as follows: Included in the above totals is $6,000 of long-term capital losses recognized by Cannon on an intercompany transaction.Excluded from the above is a $4,000 Sec.1231 gain originally deferred by Cannon that must be reported by the group in the current year.
Which one of the following statements is incorrect?
A)The consolidated group must report a net long-term capital gain of $9,000 and a net short-term capital gain of $1,000.
B)Cannon Corporation's separate return reports a $6,000 net long-term capital gain.
C)The affiliated group reports a $4,000 net Sec.1231 gain.
D)None of the above statements are incorrect.

Question

Blair and Cannon Corporations are the two members of an affiliated group.No prior net Sec.1231 losses have been reported by any group member.The two corporations report consolidated ordinary income of $100,000 and gains and losses from property transactions as follows:  Included in the above totals is $6,000 of long-term capital losses recognized by Cannon on an intercompany transaction.Excluded from the above is a $4,000 Sec.1231 gain originally deferred by Cannon that must be reported by the group in the current year.
Which one of the following statements is incorrect?
A)The consolidated group must report a net long-term capital gain of $9,000 and a net short-term capital gain of $1,000. 
B)Cannon Corporation's separate return reports a $6,000 net long-term capital gain. 
C)The affiliated group reports a $4,000 net Sec.1231 gain. 
D)None of the above statements are incorrect.

Quizplus · Accepted Answer

B)Statement A is correct because the group reports a $1,000 net short-term capital gain [($5,000)+ $6,000].The group reports a $5,000 [($6,000 - $7,000)+ $6,000 deferred loss] net long-term capital gain before taking into account the Sec.1231 gains and losses.The group reports a $4,000 [$3,000 - $3,000 + $4,000 restored gain] net Sec.1231 gain that is taxed as a long-term capital gain.The total is a $9,000 net long-term capital gain.Statement B is incorrect because Cannon Corporation reports $6,000 of short-term capital gains,$1,000 of long-term capital losses,and $1,000 of Sec.1231 gains,or a net $6,000 short-term (and not long-term)capital gain.Statement C is correct because the affiliated group reports a $4,000 net Sec.1231 gain ($3,000 from Blair and $1,000 from Cannon after adding in the restored gain).

Blair and Cannon Corporations Are the Two Members of an Affiliated