P owns all the stock of S1 and S2 Corporations. The corporations have filed consolidated tax returns for several years. In the current year (Year 1), S1 sells land to P for $100,000. S1 purchased the land several years earlier for $35,000. P sells the land to a unrelated third party in Year 3 for $115,000. The sale’s terms require the third party to pay P $50,000 in Year 3, $40,000 in Year 4, and $25,000 in Year 5, plus interest at a rate acceptable to the IRS. The third party pays all the required amounts.
a. In what year(s) does the consolidated group include S1’s gain or loss and P’s gain or loss in its taxable income?
b. Suppose P sells all of S1’s stock on December 31 of Year 4. How would this sale change your answer to Part a?
c. Suppose S1 sold the land to P in Year 1 for $120,000 instead of $100,000. How would this sale change your answer to Part a?