Sub Corporation is owned 80% by Parent Corporation and 20% by Superior Corp, a whollyowned subsidiary of Parent Corp. Sub Corp has three assets: Equipment FMV $80,000, AB$56,000; Inventory FMV $145,000, AB $110,000; Land FMV $175,000, AB $200,000.Sub adopts a formal plan of liquidation and immediately thereafter distributes its assets toParent and Superior. Superior receives the Equipment and Parent receives the remainder ofthe assets. Parent's adjusted basis in its Sub Corporation stock was equal to $240,000 andSuperior's adjusted basis in its Sub stock was equal to $60,000. Parent Corp and Superiorhad acquired their Sub Corporation stock six years prior to its liquidation.What are the tax consequences of this liquidation to Parent Corp, Superior Corp and SubCorp?Sub Corporation is owned 50% by Parent Corporation and 50% by Ultra Corp, a whollyowned subsidiary of Parent Corp. Sub Corp has three assets: Equipment FMV $55,000, AB$36,000; Inventory FMV $145,000, AB $110,000; Land FMV $200,000, AB $220,000. Subadopts a formal plan of liquidation and immediately thereafter distributes its assets to Parentand Ultra. Ultra receives the Land and Parent receives the remainder of the assets. Parent'sadjusted basis in its Sub Corporation stock was equal to $215,000 and Ultra's adjusted basisin its Sub stock was equal to $215,000. Parent Corp and Ultra had acquired their SubCorporation stock six years prior to its liquidation.What are the tax consequences of this liquidation to Parent Corp, Ultra Corp 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 owned 80% by Parent Corporation and 20% by Superior Corp, a wholly
owned subsidiary of Parent Corp. Sub Corp has three assets: Equipment FMV $80,000, AB
$56,000; Inventory FMV $145,000, AB $110,000; Land FMV $175,000, AB $200,000.
Sub adopts a formal plan of liquidation and immediately thereafter distributes its assets to
Parent and Superior. Superior receives the Equipment and Parent receives the remainder of
the assets. Parent's adjusted basis in its Sub Corporation stock was equal to $240,000 and
Superior's adjusted basis in its Sub stock was equal to $60,000. Parent Corp and Superior
had acquired their Sub Corporation stock six years prior to its liquidation.
What are the tax consequences of this liquidation to Parent Corp, Superior Corp and Sub
Corp?
Sub Corporation is owned 50% by Parent Corporation and 50% by Ultra Corp, a wholly
owned subsidiary of Parent Corp. Sub Corp has three assets: Equipment FMV $55,000, AB
$36,000; Inventory FMV $145,000, AB $110,000; Land FMV $200,000, AB $220,000. Sub
adopts a formal plan of liquidation and immediately thereafter distributes its assets to Parent
and Ultra. Ultra receives the Land and Parent receives the remainder of the assets. Parent's
adjusted basis in its Sub Corporation stock was equal to $215,000 and Ultra's adjusted basis
in its Sub stock was equal to $215,000. Parent Corp and Ultra had acquired their Sub
Corporation stock six years prior to its liquidation.
What are the tax consequences of this liquidation to Parent Corp, Ultra Corp and Sub Corp?

Expert Solution

Step 1

For the first scenario, the tax consequences of the liquidation of the Parent Corp, Superior Corp, and Sub Corp are as follows:

Sub Corp will recognize a gain or loss on the distribution of its assets to Parent Corp and Superior Corp. In this case, Sub Corp will recognize a loss of $31,000 on the distribution of its inventory and land to Parent Corp and Superior Corp.
Superior Corp will recognize a gain on the distribution of the Equipment from Sub Corp. The amount of the gain will be $20,000, which is the difference between the FMV of the Equipment ($80,000) and Superior Corp's adjusted basis in its Sub stock ($60,000).
Parent Corp will not recognize any gain or loss on the distribution of assets from Sub Corp. Parent Corp will take a basis in the assets received equal to their fair market value.
Sub Corp will be deemed to have sold its assets to Parent Corp and Superior Corp at their fair market value. As a result, Sub Corp will recognize a gain of $31,000, which is the difference between the FMV of the inventory and land ($320,000) and Sub Corp's adjusted basis in those assets ($289,000).

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