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

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The total FMV of the property is $600,000 and the total adjusted basis is $420,000 ($400,000 for Dusty Corporation's property and $20,000 for Susan's property).

Since Dusty Corporation owns 90% of Palace Corporation's stock, it is considered a related party under section 267(b) of the tax code. Therefore, the basis of the property received by Dusty Corporation cannot exceed its proportionate share of the total adjusted basis ($420,000 x 90% = $378,000).

The excess FMV over the adjusted basis ($540,000 - $378,000 = $162,000) is treated as a gain recognized by Palace Corporation.

The basis of the property received by Susan is the remaining adjusted basis ($420,000 - $378,000 = $42,000), which is equal to her stock basis of $20,000 plus her share of the recognized gain of $22,000 ($162,000 x 10% = $16,200).

Therefore, the bases of the properties are:
- Dusty Corporation's property: $378,000
- Susan's property: $42,000

Choice C is the only option that matches these bases.

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