Dusty Corporation owns 90% of Palace Corporation's stock and Susan owns the remaining stock. Dusty Corporation's stock basis is $300,000 and Susan's stock basis is $20,000. Under a plan of complete liquidation, Dusty Corporation receives property with a $400,000 adjusted basis and a $540,000 FMV and Susan receives property with a $20,000 adjusted basis and a $60,000 FMV. The bases of the properties are:

Question

Quizplus · Accepted Answer

- Dusty Corporation receives property worth $540,000, which is less than their ownership percentage of 90%. Therefore, the property received by Dusty is a dividend and their basis in the property is the lesser of the property's FMV ($540,000) or their stock basis ($300,000). So, Dusty's basis in the property received is $300,000.
- Susan receives property worth $60,000, which is equal to her stock basis of $20,000. Therefore, the property received by Susan is a return of basis and her basis in the property received remains at $20,000.
- The total value of the property received by both Dusty and Susan is $600,000. Dusty Corporation's ownership percentage of 90% means they are entitled to 90% of the total value, or $540,000, while Susan is entitled to the remaining 10%, or $60,000.
- Therefore, the bases of the properties received by Dusty and Susan are:
-- Dusty: $300,000 (limited by their stock basis)
-- Susan: $20,000 (equal to her stock basis)

Dusty Corporation Owns 90% of Palace Corporation's Stock and Susan