Question

Skylark Corporation owned 100% of the outstanding stock of Quail Corporation, having purchased the stock six years ago for $200,000. Pursuant to a plan of liquidation adopted by Quail Corporation earlier in the current year, Quail distributed all its property to its shareholder. Quail Corporation had never been insolvent and had E & P of $700,000 on the date of liquidation. Pursuant to the liquidation, Quail distributes property worth $650,000 (basis $340,000) to Skylark Corporation. How much gain must the parties recognize on the transfer of this property to Skylark Corporation?

a. $0 as to both Skylark Corporation and Quail Corporation.
b. $140,000 as to Skylark Corporation.
c. $450,000 as to Skylark Corporation.
d. None of the above.
e. $310,000 as to Quail Corporation.

Answer 1

Answer: a. $0 as to both Skylark Corporation and Quail Corporation.

Step-by-step explanation:

This scenario is handled by U.S. Code § 332 - Complete liquidations of subsidiaries because Quail is a subsidiary of Skylark Corporation.

Under this code, no loss or gain is to be recorded when a company receives property from another company as a result of a complete liquidation of the latter. Quail is being completely liquidated so its property will not count as a gain to Skylark.