Network Corporation is a publicly traded corporation with its stock widely held.It owns all of the stock of Cable Corporation.Both corporations have substantial E&P.A recent government ruling required Network to divest itself of Cable.As a result, Network distributed all of the stock of Cable to its shareholders.One Network shareholder, T, received 50 shares of Cable worth $2,000.These shares had a basis to Network of $500.T must recognize

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EThe distribution of Cable's stock to Network's shareholders, including T, is treated as a dividend for tax purposes to the extent of the distributing corporation's E&P. However, since the distribution is a complete divestiture of a subsidiary's stock, it may qualify for special tax treatment under certain sections of the Internal Revenue Code, allowing shareholders to not recognize gain or loss on the receipt of such stock. Additionally, the basis of the distributed stock in the hands of the shareholder (T) would be the same as it was in the hands of the distributing corporation (Network), which is $500. This basis adjustment means that when T eventually sells the Cable stock, T's capital gain will be calculated based on this basis. However, the question asks about the immediate tax implications of receiving the stock, not about future sales.

Network Corporation Is a Publicly Traded Corporation with Its Stock