Dusty Corporation owns 90% of Palace Corporation's stock and Susan owns the remaining stock.Dusty Corporation's stock basis is $300,000 and Susan's stock basis is $20,000.Under a plan of complete liquidation,Dusty Corporation receives property with a $400,000 adjusted basis and a $540,000 FMV and Susan receives property with a $20,000 adjusted basis and a $60,000 FMV.The bases of the properties are:

Question

Quizplus · Accepted Answer

- Dusty Corporation's 90% stock basis is $300,000, so the total stock basis for Palace Corporation is $333,333 ($300,000/0.9)
- Under the plan of complete liquidation, Palace Corporation's assets with a $540,000 FMV are distributed to Dusty Corporation, so Dusty Corporation's share of the FMV is $486,000 ($540,000 x 0.9)
- The adjusted basis of the property distributed to Dusty Corporation is $400,000, so the gain recognized is $86,000 ($486,000 - $400,000)
- Susan receives property with a $60,000 FMV, which is her share of the remaining assets after Dusty Corporation receives its distribution
- The adjusted basis of the property distributed to Susan is $20,000, so the gain recognized is $40,000 ($60,000 - $20,000)
- Therefore, Dusty Corporation's new basis in its property is $400,000 + $86,000 = $486,000, and Susan's new basis in her property is $20,000 + $40,000 = $60,000
- The bases of the properties are $486,000 and $60,000, which corresponds to choice C.

Dusty Corporation Owns 90% of Palace Corporation's Stock and Susan