Parent Corporation, Which Operates an Electric Utility, Created a 100%-Owned

question 16

Essay

Parent Corporation, which operates an electric utility, created a 100%-owned corporation, Subsidiary, that built and managed an office building. Assume the two corporations have filed separate tax returns for a number of years. The utility occupied two floors of the office building, and Subsidiary offered the other ten floors for lease. Only 25% of the total rental space was leased because of the high crime rate in the area surrounding the building. Rental income was insufficient to cover the mortgage payments, and Subsidiary filed for bankruptcy because of the poor prospects. Subsidiary's assets were taken over by the mortgage lender. Parent lost its entire $500,000 investment. At the time Subsidiary was liquidated, another $100,000 of debts remained unpaid for the general creditors, which included a $35,000 account payable to Parent. What tax issues should Parent and Subsidiary consider with respect to the bankruptcy and liquidation of Subsidiary?

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Definitions:

Remeasurement

The process of adjusting the carrying value of a financial instrument or asset to reflect its current value or changes in market conditions.

Cash Settlement

A method of settling a transaction or financial instrument in cash rather than the physical delivery of the asset.

Bid Rate

The price at which a buyer is willing to purchase securities or other assets.

Offer Rate

The interest rate at which banks lend to their most credit-worthy customers, often referred to in the context of loans and savings.