Question

The stock of Lavender Corporation is held as follows: 80% by Jade Corporation (basis of $400,000) and 20% by Tiffany (basis of $100,000). Lavender Corporation is liquidated in December of the current year, pursuant to a plan adopted earlier in the year. Pursuant to the liquidation, Lavender Corporation distributed Asset A (basis of $600,000, fair market value of $900,000) to Jade, and Asset B (basis of $250,000, fair market value of $225,000) to Tiffany. No election is made under § 338. With respect to the liquidation of Lavender:

(A) Lavender recognizes a loss of $25,000 on the distribution of Asset B.
(B) Jade has a basis in Asset A of $900,000.
(C) Tiffany has a basis in Asset B of $225,000.
(D) Jade recognizes a gain of $500,000.
(E) Lavender recognizes a gain of $300,000 on the distribution of Asset A.

Answer 1

C) Tiffany has a basis in Asset B of $225,000.

Step-by-step explanation:

Tiffany's basis in asset B is equal to the fair market value of the asset = $225,000.

When distributions are made from a subsidiary corporation to a minority shareholder, pursuant to a liquidation, the corporation can only recognize gains, but not losses. Therefore Lavender cannot recognize the $25,000 loss on the distribution of asset B to Tiffany (= $225,000 - $250,000).

Also, Jade Corporation (the parent company) does not recognize any loss or gain on the distribution, and has a basis of $600,000 in asset A which equals the Lavender's basis for the asset.