Parent Corporation owns 70% of Sam Corporation's single class of stock. This year, Parent Corporation purchases for cash the remaining 30% of Sam Corporation's stock from four individual investors pursuant to a tender offer. A plan of liquidation is approved by Sam Corporation's shareholders during the last month of this year, and Sam Corporation's assets are distributed by year-end to Parent Corporation in exchange for all of Sam's outstanding stock. Parent Corporation should
A)not recognize any gains and losses on the redemption.
B)recognize gains and losses on the redemption.
C)recognize gains but not losses on the redemption.
D)recognize losses but not gains on the redemption.

Question

Quizplus · Accepted Answer

Since Parent Corporation owned 70% of Sam Corporation's stock prior to the tender offer, the redemption of the remaining 30% does not result in any significant change in ownership. Therefore, Parent Corporation should not recognize any gains or losses on the redemption. Additionally, because the distribution of assets is made in exchange for all of Sam's outstanding stock, it should qualify as a complete liquidation under section 332 of the Internal Revenue Code, which allows the parent corporation to recognize any losses on the liquidation as ordinary losses, rather than as capital losses. However, in this scenario, there were no gains or losses to recognize.

Parent Corporation Owns 70% of Sam Corporation's Single Class of Stock