Parent Corporation for ten years has owned all of the stock of Subsidiary Corporation, which manufactures widgets. Parent's basis in Subsidiary's stock is $500,000. Subsidiary Corporation is insolvent and has no assets to redeem any of the stock that Parent Corporation owns when it liquidates. Nearly all of Subsidiary's gross income during the past five years has come from nonpassive activities. Parent can recognize
A)a $500,000 short-term capital loss.
B)a $500,000 long-term capital loss.
C)a $500,000 ordinary loss.
D)a $500,000 bad debt deduction.

Question

Quizplus · Accepted Answer

Since Subsidiary Corporation is insolvent and has no assets to redeem any of the stock that Parent Corporation owns, Parent can treat the loss as an ordinary loss under IRC Section 165(g)(3). Therefore, option C is the best choice. Option A is incorrect because a short-term capital loss is not applicable in this case. Option B is incorrect because a corporate shareholder cannot claim a long-term capital loss on the worthlessness of stock in a subsidiary. Option D is incorrect because a bad debt deduction is only available if Parent Corporation can prove that the stock became worthless because of a bad debt owed to Subsidiary Corporation.

Parent Corporation for Ten Years Has Owned All of the Stock