Calendar year ParentCo acquired all of the stock of SubCo on January 1, Year 1, for $1,000,000. The parties immediately elected to file consolidated income tax returns. SubCo generated taxable income of $250,000 for Year 1 and paid a dividend of $100,000 to ParentCo. In Year 2, SubCo generated an operating loss of $350,000, and in Year 3 it produced taxable income of $750,000. As of the last day of Year 3, what was ParentCo's basis in the stock of SubCo?
A)$1,650,000
B)$1,550,000
C)$1,000,000
D)$0

Question

Quizplus · Accepted Answer

ParentCo's initial basis in SubCo was $1,000,000. In Year 1, SubCo generated taxable income of $250,000, which was included in the consolidated return. Therefore, the basis in SubCo increased to $1,250,000. SubCo also paid a dividend of $100,000 to ParentCo, which did not affect the basis. 
In Year 2, SubCo generated an operating loss of $350,000, which reduced the basis to $900,000. In Year 3, SubCo generated taxable income of $750,000, which was again included in the consolidated return and increased the basis to $1,650,000. Therefore, as of the last day of Year 3, ParentCo's basis in the stock of SubCo was $1,650,000 (Option B).

Calendar Year ParentCo Acquired All of the Stock of SubCo