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:

Assembly Line Wages

Wages paid to workers who are involved in the operations of an assembly line, typically in a manufacturing process.

Raw Materials

The basic materials that are processed and converted through manufacturing into finished goods.

Factory Utilities

Costs incurred for utilities in a manufacturing setting, such as electricity, gas, and water, essential for production operations.

Gross Profit

Monetary gain made after subtracting the cost of goods sold from total sales revenue, indicating the efficiency of a company's core business activities without including overhead costs.