P Corporation owns all the stock of S1 and S2 Corporations, and the three corporations have filed consolidated tax returns on a calendar year basis for several years. P owns 2,400 shares of publicly traded stock it purchased several years ago for $30 per share. P sells all the stock to S1 for $45 per share on January 25 of the current year (Year 1). S1 sells 1,400 shares of the stock to a third party for $48 per share on December 6 of Year 1, and S1 sells the other 1,000 shares to another third party for $52 per share on March 18 of Year 2.
a. What are the intercompany item, the corresponding items, and the recomputed corresponding items for this intercompany transaction?
b. In what year(s) are P’s gain or loss and S1’s gain or loss included in consolidated taxable income?
c. Suppose P sells all of S1’s stock to a third party on December 30 of Year 1. How would your answer to Part b change?
d. Suppose S1 sells the 1,000 shares on March 18 of Year 2, for $44 per share instead of $52 per share. How would your answers to Parts a and b change?