Calendar year ParentCo acquired all of the stock of SubCo on January 1, 2013, for $1,000,000. The parties immediately elected to file consolidated income tax returns. SubCo generated taxable income of $250,000 for 2013 and paid a dividend of $100,000 to ParentCo. In 2014, SubCo generated an operating loss of $350,000, and in 2015 it produced taxable income of $750,000. As of the last day of 2015, what was ParentCo's basis in the stock of SubCo?

Question

Quizplus · Accepted Answer

ParentCo's basis in the stock of SubCo increases with taxable income and decreases with losses and distributions.

At the end of 2013, ParentCo's basis in the stock of SubCo would be:
Initial investment: $1,000,000
Plus SubCo's 2013 taxable income: $250,000
Minus dividend received from SubCo: $100,000
ParentCo's basis at the end of 2013: $1,150,000

At the end of 2014, ParentCo's basis in the stock of SubCo would be:
Basis at the end of 2013: $1,150,000
Minus SubCo's 2014 operating loss: $350,000
ParentCo's basis at the end of 2014: $800,000

At the end of 2015, ParentCo's basis in the stock of SubCo would be:
Basis at the end of 2014: $800,000
Plus SubCo's 2015 taxable income: $750,000
ParentCo's basis at the end of 2015: $1,550,000

Therefore, the correct answer is B. $1,550,000.

Calendar Year ParentCo Acquired All of the Stock of SubCo