P and S Corporations have filed consolidated tax returns for several years. In Year 1, P purchased land as an investment for $20,000. In Year 3, P sold the land to S for $60,000. S used the land for four years as additional parking space for its employees and made no improvements to the land. In Year 7, S sells the land to Z Corporation, an unrelated party, for $180,000. The sale’s terms require Z to pay S $36,000 in each of Years 7 through 11. The terms also require Z to pay S interest at a rate acceptable to the IRS. Z pays all the required amounts.
a. What are the intercompany item, the corresponding items, and the recomputed corresponding items?
b. In what year(s) does the consolidated group include P’s gain or loss and S’s gain or loss in its taxable income?
c. How does the consolidated group report the interest income?