Prime Corporation liquidates its 85%-owned subsidiary Bass Corporation under the provisions of Secs. 332 and 337. Bass Corporation distributes land to its minority shareholder, John, who owns a 15% interest. The property received by John has a $55,000 FMV. The land was used in the Bass Corporation's business and has a $65,000 adjusted basis and is subject to a $10,000 liability, which is assumed by John. John's basis in his stock is $25,000. What gain or loss will John and Bass Corporation recognize on the distribution of the land?

Question

Quizplus · Accepted Answer

When a subsidiary is liquidated, any property distributed to minority shareholders is treated as though the subsidiary had sold the property at FMV. Therefore, Bass Corporation will have a recognized loss of $10,000 ($65,000 basis – $55,000 FMV) on the distribution. John will have a realized gain of $30,000 ($55,000 FMV – $25,000 basis in stock – $10,000 liability assumed), but will reduce this gain to zero due to the distribution being treated as a liquidation of his interest in Bass Corporation. Therefore, no gain or loss will be recognized by John. The correct answer is B.

Prime Corporation Liquidates Its 85%-Owned Subsidiary Bass Corporation Under the Provisions