[Anonymous]

Parent Corp. and Subsidiary Corp. file consolidated returns on a calendar-year basis. In January 2009, Subsidiary sold land, which it had used in its operations, to Parent for $75,000. Immediately before this sale, Subsidiary’s basis for the land was $45,000. Parent held the land primarily for sale to customers in the ordinary course of business. In July 2010, Parent sold the land to Dubin, an unrelated individual, for $90,000. In determining the consolidated taxable income for 2010, how much should Subsidiary take into account as a result of the 2009 sale of land from Subsidiary to Parent?

A. $45,000

B. $30,000

C. $22,500

D. $15,000

Answer is B, why???

Is it because interrelated party gains ARE recognized, losses aren’t. I thought, subsidiary won’t recognize anything in ’09, but will recognize $45,000 in ’10?

Obviously, I’m wrong…

[SDTrojan1904]

Just taking a stab at this but not sure if I'm right.

I think the answer is referring to the built in gain that was passed over during the first sale to Parent but it isn't recognized until its sold to an unrelated party. Once it's sold, then there is a $30K gain for Subsidiary Corp and and $15K gain for Parent since Parent bought it for 75K.

Can anyone confirm if I have the right idea? I'm assuming the basis for Parent is stepped up to $75K?

[Anonymous]

Similar question as this was in Becker, and here's what its solution said:

“Gain on the sale from Sub to Parent is inter-company gain would be eliminated during consolidation. Once the sale is completed from Parent to another party, the full gain ($45,000) would be recognized in tax return.”

This is much different than Wiley. Based on Becker, Sub wouldn't report/recognize anything. Am I not understanding the question correctly?

[Anonymous]

According to what I read, when there is a gain from a sale between Parent and Sub, the gain is deferred and will get recognized in the year it's sold to an unrelated party. So, I'm not sure why this question says otherwise…

[Anonymous]

Ok wait…. this is why it's very important to read the question!

The question states….”In determining the consolidated taxable income for 2010, how much should Subsidiary take into account as a result of the 2009 sale of land from Subsidiary to Parent?”

In 2011, the recognized gain from the sale to an unrelated party will be $45,000 ($30,000 from the 2010 sale to the parent and $15,000 from the 2011 sale to the unrelated party). The question is asking how much of the gain from 2010 are we taking into account when determining the gain in 2011. That would be…$30,000 because that's the amount we defer to 2011. We don't recognize that $30,000 until we officially sell to an unrelated party.

[Anonymous]

You know, I type these posts up so fast that I make such careless typos. There's no 2011 in that questions. Let me correctly restate what I just said earlier….

In 2010, the recognized gain from the sale to an unrelated party will be $45,000 ($30,000 from the 2009 sale to the parent and $15,000 from the 2010 sale to the unrelated party). The question is asking how much of the gain from 2009 are we taking into account when determining the gain in 2010. That would be…$30,000 because that's the amount we defer to 2010. We don't recognize that $30,000 until we officially sell to an unrelated party.

Anyways, I think you understand the concept here, it's just that you got confused with what exactly they were asking in the question.

[Anonymous]

@CPAman…I think your explaination is correct. The question was asking subsidiary's portion, not all the profit. I am not sure if you can use the word “defer” since there are inter-company transactions. The gain of $30,000 was eliminated from consolidation. So, in 2010, the base of the asset is still $45,000 before it's sold…I personally don't like this question anyway…I hate questions doesn't test your foundamental understanding of concepts but test if you have missed one word of the question…

[Author]

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