Skylark Corporation Owned 100% of the Outstanding Stock of Quail

question 27

Multiple Choice

Skylark Corporation owned 100% of the outstanding stock of Quail Corporation having purchased the stock six years ago for $200,000. Pursuant to a plan of liquidation adopted by Quail Corporation earlier in the current year, Quail distributed all its property to its shareholder. Quail Corporation had never been insolvent and had E & P of $700,000 on the date of liquidation. Pursuant to the liquidation, Quail distributes property worth $650,000 (basis $340,000) to Skylark Corporation. How much gain must the parties recognize on the transfer of this property to Skylark?

• A) $0 as to both Skylark and Quail.
• B) $140,000 as to Skylark.
• C) $310,000 as to Quail.
• D) $450,000 as to Skylark.
• E) None of these.

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Definitions:

Firm's Assets

The economic resources or valuable items owned by a company that are expected to provide future benefits.

Call Option

A financial contract that gives the buyer the right, but not the obligation, to buy a stock, bond, commodity, or other asset at a specific price within a specific time period.

Strike Price

The agreed-upon rate at which the possessor of an option may acquire (if it's a call option) or dispose of (if it's a put option) the underlying financial instrument or commodity.

Option

A financial derivative that gives the holder the right, but not the obligation, to buy or sell an asset at a specified price within a specified time.