Question 1

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

Accepted Answer

Consolidated return rules (IRC §1502): Intercompany transactions are deferred. The gain is realized but not recognized until the asset leaves the group. When Sub sells to outsider, Parent recognizes its deferred gain AND Sub recognizes its own gain.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Recognizing the gain in Year 1; forgetting to add the deferred gain to the Year 2 gain.

How to approach this question

Full Answer

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