Calendar year ParentCo purchased all of the stock of SubCo on January 1, 2013, for $500,000. SubCo produced a loss for 2013 of $150,000 and distributed cash of $25,000 to ParentCo. In 2014, SubCo generated a loss of $450,000; in 2015, it recognized net income of $90,000. What is ParentCo's capital gain or (loss) if it sells all of its SubCo stock to a nongroup member on January 1, 2016, for $150,000?

Question

Quizplus · Accepted Answer

ParentCo's basis in SubCo is $500,000. The loss of $150,000 in 2013 reduces the basis to $350,000. The loss of $450,000 in 2014 further reduces the basis to $100,000. The net income of $90,000 in 2015 increases the basis to $190,000. The sale of the stock for $150,000 results in a capital loss of $40,000. However, the loss is disallowed under IRC Sec. 267(a)(1) because SubCo is a related party. Therefore, the capital loss is deferred and ParentCo's basis in the stock remains at $190,000.

Calendar Year ParentCo Purchased All of the Stock of SubCo