Question

Parent Corporation purchased 75 percent of Subsidiary Corporation in 2000; Subsidiary’s current balance sheet shows the following figures: Basis Value Demand Deposit $20,000 $20,000 IBM Stock $30,000 $50,000 Parking Lot $5,000 $30,000 Building 0 $100,000 Mortgage ($15,000) ($15,000) Subsidiary has a net operating loss carryover in 2006 of $7,000 and earnings and profits of $22,000. The subsidiary redeemed in 2003 the 25% shareholder Roy Rogers. The Subsidiary distributed the IBM stock for his 25% interest. In 2006, Subsidary adpots a plan of liquidation. a. What is the tax result to Roy in 2003? (i.e. realized, recognized gain or loss, tax character)? b. Does subsidiary recognize any gain on the redemption and the liquidation? (i.e. realized, recognized, and the tax character)? c. What are Parent’s basis for the assets received? d. What happens to Subsidiary’s NOL and E&P? In your analysi give computation anf the IRC section.

Answer 1

a. What is the tax result to Roy in 2003? (i.e. realized, recognized gain or loss, tax character)?

Particulars	Formula	Amount
Roy Realized Gain	(Amount Realized - Adjusted Basis) ($50,000 - $30000)	$      20,000
The stock is a capital asset in the hands of the shareholder, the shareholder will have capital gain/loss on the exchange. The maximum tax rate for both long-term capital gains (realized between 5th May, 2003 and 2013) and dividends (for tax years between 2002 and 2013) is 15%.
Hence, Tax ($20,000 * 15%)		$        3,000

b. Does subsidiary recognize any gain on the redemption and the liquidation? (i.e. realized, recognized, and the tax character)

when there is indebtness owed to the parent corporation , then subsidiary will not recognise any gain on the redemption and subsidiary plans for liquidation, the subsidiary will not recognise any gain on redemption.

c. What are Parent’s basis for the assets received?

Parent's basis for the assets received will be 75 percent of the Demand Deposit, Parking Lot, Building and Mortgages.

d. What happens to Subsidiary’s NOL and E&P?

75% of Subsidiary’s NOL and E&P will carry over to the Parent