Tax Research Problem 6-59

Parent Corporation owns 85% of the common stock and 100% of the preferred stock of Subsidiary Corporation. The common stock and preferred stock have adjusted bases of $500,000 and $200,000, respectively, to Parent. Subsidiary adopts a plan of liquidation on July 3 of the current year, when its assets have a $1 million FMV. Liabilities on that date amount to $850,000. On November 9, Subsidiary pays off its creditors and distributes $150,000 to Parent with respect to its preferred stock. No cash remain to be aid to Parent with respect to the remaining $50,000 of its liquidation preference for the preferred stock, or with respect to any common stock. In each of Subsidiary’s tax years, less than %10 of its gross …show more content…

Therefore, the distribution does not meet Sec. 332 requirement. Parent will be able to recognize the losses on their preferred and common stock. Parent can recognize a $50,000 loss on the preferred stock and a $500,000 loss on the common stock.
The character of both losses will be ordinary, Sec. 165(g)(3) states, “any security in a corporation affiliated with a taxpayer which is a domestic corporation shall not be treated as a capital asset” Parent Corporation meets the requirements of securities in affiliated corporation. Sec 165(g)(3), requires direct stock ownership and that more than 90% of income received is not passive income. Parent Corporation owns 85% and 100% of preferred and common stock respectively. Less than 10% of subsidiary’s income was passive. Therefore, Parent will recognize a $50,000 ordinary loss on its preferred stock and a $500,000 ordinary loss of its common stock.

Sec.332(a) General rule
No gain or loss shall be recognized on the receipt by a corporation of property distributed in complete liquidation of another corporation.
Sec332(b)(2) the distribution is by such other corporation in complete cancellation or redemption of all its stock, and the transfer of all the property occurs within the taxable year; in such case the adoption by the shareholders of the resolution under which is authorized the distribution of all the assets of such corporation in complete cancellation or redemption of all its stock shall