Rev. Rul. 60-245

M corporation which is engaged in the construction business, is the common parent of an affiliated group of corporations which has filed consolidated income tax returns since 1954. In 1955, M constructed an apartment building for its wholly-owned subsidiary, N, a member of the affiliated group, at a profit of 10x dollars. The 10x dollar profit on this transaction was eliminated on the consolidated return of the group for 1955, in accordance with section 1.1502-31(b)(1)(i) of the Income Tax Regulations, as an unrealized profit from an intercompany transaction. In 1959, M sold all of the stock of N to a party outside the affiliated group. At the time of the sale of its stock, N was still in possession of the apartment building. Held, the previously eliminated intercompany profit of 10x dollars, less the excess of depreciation on the building based on the construction price before the intercompany elimination over the depreciation based on the construction price reduced by the intercompany elimination, became a realized profit of M and subject to tax as ordinary income in 1959, the year in which the stock of N was sold to a party outside the affiliated group. The basis of the property in the hands of N, as reduced by the intercompany profit, is increased at the time that the N stock was sold by the amount of intercompany profit includible in the income of M.