USAco, a domestic corporation, distributes its widgets in country F through a wh

Question

USAco, a domestic corporation, distributes its widgets in country F through a wholly-owned foreign subsidiary, FORco. During the current year, USAco liquidates FORco. At the time of the liquidation, FORco has $100,000 of accumulated earnings and profits, and total assets worth $200,000. USAco has a $40,000 basis in the stock of FORco. What are the tax consequences of the liquidation for USAco?

(a) USAco does not recognize any income

(b) USAco recognizes a 100,000 dividend

(c) USAco recognizes a 160,000 capital gain

(d) usaco recognizes a 100,000 dividend and a 60,000 capital gain

Explanation / Answer

USAco, a domestic corporation, distributes its widgets in country F through a wholly-owned foreign subsidiary, FORco. During the current year, USAco liquidates FORco. At the time of the liquidation, FORco has $100,000 of accumulated earnings and profits, and total assets worth $200,000. USAco has a $40,000 basis in the stock of FORco. What are the tax consequences of the liquidation for USAco?

(c) USAco recognizes a 160,000 capital gain (Total Assets worth - Basis) = 200000 – 40000 = $160,000

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