ParentCo acquired all of the stock of SubCo on January 1,2009,for $1,000,000.The parties immediately elected to file consolidated income tax returns.SubCo generated taxable income of $150,000 for 2009 and paid a dividend of $100,000 to ParentCo.In 2010,SubCo generated an operating loss of $350,000,and in 2011 it produced taxable income of $75,000.As of the last day of 2011,what was ParentCo's basis in the stock of SubCo?

Question

Quizplus · Accepted Answer

ParentCo's basis in the stock of SubCo is affected by the income or losses of SubCo and any dividends paid to ParentCo. In 2009, SubCo generated taxable income of $150,000, but this was offset by the $100,000 dividend paid to ParentCo, leaving a net increase of $50,000 in the basis. In 2010, SubCo generated an operating loss of $350,000, which decreased the basis to $425,000. In 2011, SubCo produced taxable income of $75,000, which increased the basis to $500,000. Therefore, the basis at the end of 2011 is $500,000 + $275,000 (the net increase in basis in 2009) = $775,000.

ParentCo Acquired All of the Stock of SubCo on January