Penguin Corporation purchased bonds (basis of $95,000)of its 100% owned subsidiary,Finch Corporation,at a discount.Pursuant to a § 332 liquidation and in satisfaction of the indebtedness,Finch distributes land worth $100,000 (basis of $110,000)to Penguin.Which of the following statements is correct with respect to the distribution of land?
A)Neither Finch nor Penguin recognize gain (or loss).
B)Finch recognizes a loss of $10,000 and Penguin recognizes no gain.
C)Finch recognizes a loss of $10,000 and Penguin recognizes a gain of $5,000.
D)Finch recognizes no loss and Penguin recognizes a gain of $5,000.
E)None of the above.

Question

Quizplus · Accepted Answer

When a subsidiary distributes property to its parent in a § 332 liquidation, no gain or loss is recognized by either party, except to the extent of any liabilities assumed by the parent. In this case, Finch distributes land worth $100,000 with a basis of $110,000 to Penguin in satisfaction of the bonds, which have a basis of $95,000. Therefore, Finch recognizes no loss because the property's fair market value equals the carrying amount of the liability satisfied. Penguin's basis in the land is deemed to be the same as its basis in the bonds, or $95,000. Because the fair market value of the land is $100,000, Penguin recognizes a gain of $5,000.

Penguin Corporation Purchased Bonds (Basis of $95,000)of Its 100% Owned