Prime Corporation liquidates its 85%-owned subsidiary Bass Corporation under the provisions of Secs. 332 and 337. Bass Corporation distributes land to its minority shareholder, John, who owns a 15% interest. The property received by John has a $55,000 FMV. The land was used in the Bass Corporation's business and has a $65,000 adjusted basis and is subject to a $10,000 liability, which is assumed by John. John's basis in his stock is $25,000. What gain or loss will John and Bass Corporation recognize on the distribution of the land?

Question

Quizplus · Accepted Answer

When a subsidiary corporation is liquidated into its parent corporation under Secs. 332 and 337, the parent corporation generally does not recognize any gain or loss on the distribution of property to its shareholders if the parent corporation owns at least 80% of the subsidiary's stock. The minority shareholder, John, will recognize a gain to the extent of the FMV of the property received minus his assumed liability. John's total gain is $45,000 ($55,000 FMV - $10,000 liability assumed). However, because John's basis in his stock is only $25,000, he can only recognize $25,000 of the gain, resulting in $20,000 of unrecognized gain. John's basis in the property received is its FMV minus his recognized gain or $30,000 ($55,000 FMV - $25,000 recognized gain). Bass Corporation will recognize a loss on the distribution of the property equal to the difference between its adjusted basis ($65,000) and the amount realized (which includes the assumed liability of $10,000), or $55,000.

Prime Corporation Liquidates Its 85%-Owned Subsidiary Bass Corporation Under the Provisions