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

question 41

Multiple Choice

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.

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Definitions:

Atomic Sentences

Sentences that express a basic fact or idea without combining or including any logical operations or propositions.

Hypothetical Syllogism (HS)

A logical argument formed by two conditional statements and a conclusion that follows from chaining the conditionals together.

Modus Ponens (MP)

A logical argument form that asserts if "P implies Q" and "P is true," then "Q must also be true."

Modus Tollens (MT)

A logical argument form where the denial of the consequent leads to the denial of the antecedent, often structured as "If P, then Q. Not Q, therefore not P."