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:

Carrier

An individual or entity that transports or conveys substances, signals, or conditions. In genetics, it refers to someone who has one copy of a gene mutation but does not exhibit disease symptoms.

Genetic Disorder

A condition caused by abnormalities in an individual's DNA, leading to physical or physiological issues.

Diet

The variety and amount of food and drink consumed by a person, which can impact health, weight, and well-being.

PKU

Short for Phenylketonuria, a genetic disorder resulting from the body's inability to break down the amino acid phenylalanine, potentially leading to intellectual disability if untreated.