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 under Secs. 332 and 337, any distribution of property to its shareholders is not taxable to the distributing corporation or to the shareholders themselves, as long as the distribution is made in complete liquidation of the subsidiary.
In this case, John receives a distribution of land with a $55,000 FMV, which is subject to a $10,000 liability assumed by John. Thus, John's net property received has a value of $45,000. John's basis in his stock is $25,000. As a result, John will recognize a gain of $20,000 ($45,000 - $25,000) on the distribution. However, since Bass Corporation is being liquidated and the distribution is made in complete liquidation of the subsidiary, no gain or loss is recognized by Bass Corporation on the distribution.

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