Parent Corporation Owns 100% of the Stock of Subsidiary Corporation

question 30

Essay

Parent Corporation owns 100% of the stock of Subsidiary Corporation. The adjusted basis of its stock investment is $100,000. A plan of liquidation is adopted. Subsidiary distributes to Parent assets with a $325,000 FMV and a $275,000 adjusted basis. Subsidiary also distributes liabilities in the amount of $40,000. Subsidiary has a $150,000 E&P balance.
a)What is the amount and character of Subsidiary Corporation's recognized gain or loss on the distribution?
b)What is the amount and character of Parent Corporation's recognized gain or loss on the redemption of the Subsidiary stock?
c)What basis does Parent take in the assets?
d)What happens to parent Corporation's basis in the Subsidiary stock and to Subsidiary's tax attributes?

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Definitions:

Qualifying Relative

A term used in tax law to describe someone who doesn’t have to live with the taxpayer all year but must meet certain financial support and income criteria to be claimed as a dependent.

Gross Income Test

A requirement for determining if someone can be claimed as a dependent, based on their income level.

Specific Tests

Refer to criteria or conditions applied to determine eligibility or compliance in various contexts, such as tax law or regulations.

Qualifying Child

A dependent of a taxpayer that meets specific IRS criteria related to relationship, age, residence, and support for eligibility for certain tax benefits.