Question

Parent Corporation owns 100% of the stock of Subsidiary Corporation. The adjusted basis of its stock investment is $100,000. A plan of liquidation is adopted. Subsidiary distributes to Parent assets with a $325,000 FMV and a $275,000 adjusted basis. Subsidiary also distributes liabilities in the amount of $40,000. Subsidiary has a $150,000 E&P.

a) What is the amount and character of Subsidiary Corporation's recognized gain or loss on the distribution?

Answer 1

The recognized gain or loss on the distribution by Subsidiary Corporation is a $50,000 dividend and a $100,000 return of capital.

Step-by-step explanation:

The recognized gain or loss on the distribution by Subsidiary Corporation to Parent Corporation can be calculated as follows:

1. First, we need to determine the amount of the distribution. The assets distributed by Subsidiary to Parent have a fair market value (FMV) of $325,000 and an adjusted basis of $275,000.
2. The difference between the FMV and adjusted basis is the amount of the distribution. In this case, the distribution amount is $325,000 - $275,000 = $50,000.
3. Next, we need to determine the character of the distribution. Subsidiary has a $150,000 earnings and profits (E&P). The entire distribution ($50,000) is treated as a dividend to the extent of the Subsidiary's E&P ($150,000). Therefore, $50,000 of the distribution is treated as a dividend.
4. Finally, the remaining amount of the distribution ($50,000 - $150,000 = -$100,000) is treated as a return of capital. Since the adjusted basis of Parent's stock investment is $100,000, the entire remaining distribution is treated as a return of capital.

Therefore, the amount and character of Subsidiary Corporation's recognized gain or loss on the distribution is a $50,000 dividend and a $100,000 return of capital.