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)$0 gain.
B)$200,000 gain.
C)$300,000 gain.
D)none of the above

Question

Quizplus · Accepted Answer

Under the Internal Revenue Code, specifically sections 332 and 337, when a parent corporation owns 100% of the stock of a subsidiary and the subsidiary liquidates, the parent corporation generally does not recognize gain or loss on the receipt of the subsidiary's assets in complete liquidation. The parent corporation takes a carryover basis in the assets received, which in this scenario would be the subsidiary's adjusted basis of $700,000, not the fair market value (FMV). Therefore, the parent corporation would not recognize any gain as a result of the liquidation.

Parent Corporation Owns 100% of the Single Class of Stock