Parent Corporation owns 100% of Subsidiary Corporation’s single class of stock.
ID: 2438015 • Letter: P
Question
Parent Corporation owns 100% of Subsidiary Corporation’s single class of stock. Parent has a basis of $1.3 million in Subsidiary stock.
Subsidiary adopts a plan of liquidation whereby it distributes property having a basis of $2.4 million and a fair market value of $4 million in redemption of the Subsidiary stock.
What gain or loss does the Subsidiary realize and recognize because of making the liquidating distribution?
What gain or loss does Parent realize and recognize on the surrender of the Subsidiary stock?
What happens to Parent’s basis in Subsidiary?
Explanation / Answer
Loss to subsidiary on making the liquidating distribution realised and recognised would be calculated by subtracting Parent's basis of subsidiary stock from book value of property distributed on redemption of subsidiary stock:
$2.4million-$1.3million=$1.1million
Gain realised and recognised on the surrender of subsidiary stock would be calculated by subtracting Parent's basis in subsidiary stock from fair market value of property received in redemption of subsidiary stock:
$4million-$1.3million=$2.7million
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