Question

19.

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 $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.
		A $25,000 capital gain and a $50,000 Sec. 1231 gain are included in consolidated taxable income when Subsidiary sells the land.
		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).
		None of the above are correct.

20.

The Internal Revenue Code includes which of the following assets in the definition of Sec. 751 properties?

		cash
		capital assets
		inventory, which is substantially appreciated
		Sec. 1231 assets

21.

Susan contributed land with a basis of $6,000 and an FMV of $10,000 to the SH Partnership two years ago to acquire her partnership interest. This year, the land is distributed to Harry when its FMV is $11,000. No other distributions have been made since Susan became a partner. When the land is distributed, the partnership's basis in the land immediately before distribution is increased by

		$0.
		$4,000.
		$5,000.
		$1,000.

Answer 1

Question No. (19)

Answer -

Step - (1) - Facts of the case given -

Parent Corporation sells land to Subsidiary Corporation in an inter-company transaction, realizing a $25000 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 $50000 gain is realized.

Step - (2) - Correct Accounting treatment -

A $75000 Sec.1231 gain ($25000 from Parent and $50000 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).

Hence, Option - (C) is Correct.

.

Question No. (20)

Answer -

Section 751 of the IRS tax code includes inventory, which is substantially appreciated.

Hence, Option - (C) is Correct.

.

Question No. (21)

Answer -

Analysis and Conclusion -

Susan contributed land with a basis of $6000 and an FMV of $10000 to the SH Partnership two years ago to acquire her partnership interest.

This year, the land is distributed to Harry when its FMV is $11000. No other distributions have been made since Susan became a partner.

When the land is distributed, the partnership's basis in the land immediately before distribution is increased by ($10000 - $6000) = $4000.

Hence, Option - (B) is Correct.