Princetown Inc. has a $4.82 million basis in 88% of the outstanding stock of Merryvale Corporation. Merryvale manufactures Christmas decorations, cards, and wrapping paper. Princetown's board of directors recently learned that Merryvale is bankrupt. The board voted unanimously to dissolve the corporation and distribute all assets to Merryvale's creditors. What is the tax consequence to Princetown of the board's actions?

Question

Quizplus · Accepted Answer

When a corporation becomes bankrupt and is dissolved, shareholders may recognize a loss on their investment. In this case, Princetown Inc. has a basis in the Merryvale stock of $4.82 million. Since the stock is now worthless due to Merryvale's bankruptcy, Princetown can recognize an ordinary loss of $4.82 million on its tax return. Therefore, the correct answer is choice D.