Question

Parent Corporation owns​ 80% of the stock of Subsidiary​ Corporation, which is insolvent. Tracy owns the remaining​ 20% of the stock. The courts determine Subsidiary to be bankrupt. The shareholders receive nothing for their investment. How do they report their losses for tax​ purposes?

Answer 1

Shareholders report losses from a bankrupt subsidiary corporation as capital losses on their tax returns. Individuals claim a capital loss in the year the stock became worthless.

Corporations must follow specific tax rules, and seeking professional advice is essential for accurate filing.

Step-by-step explanation:

When a subsidiary corporation becomes insolvent and is deemed bankrupt, the shareholders, which include the Parent Corporation owning 80% and an individual named Tracy owning the remaining 20%, may report their losses for tax purposes as a capital loss.

As shareholders, they have a claim on partial ownership of the company and share in its profits and losses. However, due to bankruptcy, where shareholders typically receive nothing, they would report their loss by writing off the investment in their tax filings.

The ability to deduct these losses is subject to various tax rules and limitations based on whether the investment was in personal capacity or as part of business assets.

If an individual's stock investment becomes worthless, they can claim a capital loss on their personal tax return in the year the stock became worthless.

For the Parent Corporation, the treatment may be different and depends on whether they consolidate their tax returns with the subsidiary or not. It is essential for both the Parent Corporation and Tracy to consult with tax professionals to ensure proper compliance with tax regulations.