Sub Corporation is a wholly owned subsidiary of Parent Corporation. Sub Corp has threeassets: Cash $20,000; Inventory FMV $200,000, AB $140,000; Land FMV $180,000, AB$210,000. Sub adopts a formal plan of liquidation and immediately thereafter distributes itsassets to Parent. Parent's adjusted basis in its Sub Corporation stock was equal to $285,000.Parent had acquired Sub Corporation six years prior to the liquidation.What are the tax consequences of this liquidation to Parent Corp and Sub Corp?Sub Corporation is owned 95% by Parent Corporation and 5% by Brian an unrelated person.Sub Corp has three assets: Equipment FMV $20,000, AB $6,000; Inventory FMV $200,000,AB $140,000; Land FMV $180,000, AB $210,000. Sub adopts a formal plan of liquidationand immediately thereafter distributes its assets to Parent. Parent's adjusted basis in its SubCorporation stock was equal to $285,000 and Brian's adjusted basis in his Sub stock wasequal to $13,500. Parent Corp and Brian had acquired their Sub Corporation stock six yearsprior to its liquidation.What are the tax consequences of this liquidation to Parent Corp, Brian and Sub Corp?

Answered: What are the tax consequences of this…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Sub Corporation is a wholly owned subsidiary of Parent Corporation. Sub Corp has three
assets: Cash $20,000; Inventory FMV $200,000, AB $140,000; Land FMV $180,000, AB
$210,000. Sub adopts a formal plan of liquidation and immediately thereafter distributes its
assets to Parent. Parent's adjusted basis in its Sub Corporation stock was equal to $285,000.
Parent had acquired Sub Corporation six years prior to the liquidation.
What are the tax consequences of this liquidation to Parent Corp and Sub Corp?
Sub Corporation is owned 95% by Parent Corporation and 5% by Brian an unrelated person.
Sub Corp has three assets: Equipment FMV $20,000, AB $6,000; Inventory FMV $200,000,
AB $140,000; Land FMV $180,000, AB $210,000. Sub adopts a formal plan of liquidation
and immediately thereafter distributes its assets to Parent. Parent's adjusted basis in its Sub
Corporation stock was equal to $285,000 and Brian's adjusted basis in his Sub stock was
equal to $13,500. Parent Corp and Brian had acquired their Sub Corporation stock six years
prior to its liquidation.
What are the tax consequences of this liquidation to Parent Corp, Brian and Sub Corp?

Expert Solution

Step 1

For the first scenario, where Sub Corporation is wholly owned by Parent Corporation, the tax consequences of the liquidation are as follows:

Sub Corporation will recognize gain or loss on the distribution of its assets to Parent. In this case, the cash distribution will not result in any gain or loss, but the distribution of inventory and land will result in a loss of $20,000 (the difference between the AB and FMV of the inventory) and a gain of $30,000 (the difference between the FMV and AB of the land), respectively.

Parent Corporation will recognize a gain or loss on the liquidation of Sub Corporation equal to the difference between its adjusted basis in Sub Corporation stock ($285,000) and the total liquidating distributions received from Sub ($400,000). In this case, Parent Corporation will recognize a loss of $115,000.

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