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Parent Corporation owns 100% of the single class of stock of Subsidiary Corporation. Parent's basis in the Subsidiary stock is $500,000 when Parent completely liquidates Subsidiary Corporation within a single tax year. The Subsidiary Corporation assets have a $700,000 adjusted basis and an $800,000 FMV at liquidation. As a result of the liquidation, Parent must recognize a

A. $300,000 gain.
B. $0 gain.
C. $200,000 gain.
D. none of the above1.

Answer :

Answer:

correct option is B. $0 gain.

Explanation:

given data

owns stock  = 100%

Subsidiary stock = $500,000

assets adjusted basis =  $700,000

FMV at liquidation = $800,000

solution

A subsidy recipient may cause a general benefit or loss to the shareholder, although this is not an accurate estimate of the complete liquidation of certain subsidiaries. The conditions for such treatment are:

  • All classes of holding / parent company shares have at least 80% voting power and have at least 80% voting power before the commencement of liquidation.
  • The liquidation must be completed within one year of receipt of the plan before the end of the first taxable year in the first distributed assessment year under the plan.

The above two situations appear in the questionnaires. If the parent company has 100% single stock shares and liquidation in the taxable year, the profit will not be recognized.

correct option is B. $0 gain.

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