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 portion:
   - Basis of property received = Adjusted basis of property received = $400,000
   - Gain recognized = FMV of property received - Adjusted basis of property received = $540,000 - $400,000 = $140,000
   - Since Dusty Corporation owns 90% of Palace Corporation's stock, Dusty Corporation will recognize 90% of the gain = $126,000
   - Dusty Corporation's stock basis will increase by the amount of gain recognized = $300,000 + $126,000 = $426,000
- Susan's portion:
   - Basis of property received = Adjusted basis of property received = $20,000
   - Gain recognized = FMV of property received - Adjusted basis of property received = $60,000 - $20,000 = $40,000
   - Since Susan owns the remaining 10% of Palace Corporation's stock, Susan will recognize 10% of the gain = $4,000
   - Susan's stock basis will increase by the amount of gain recognized = $20,000 + $4,000 = $24,000

Therefore, the bases of the properties are:
- Dusty Corporation's property: $400,000
- Susan's property: $20,000

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