Question

ParentCo sells street vending carts and has been in business for 10 years. The subsidiary, SubCo, has been in the business of selling refrigerated vending carts for 8 years. ParentCo acquired SubCo from X-Corp in a single stock class 100% acquisition. ParentCo has divests itself of SubCo. You are a shareholder who has less than 1% of the SubCo stock. The stock basis is $40,000. As a result of the divestiture, you receive 25 shares of SubCo stock. This stock has a $25,000 fair market value. Your ParentCo stock has a fair market value of $75,000 after the divestiture. ParentCo has E&P of $2,500,000 at the end of the year.

What is the amount and character of the gain, loss or income that must be recognized by you as a result of the distribution of the SubCo stock?

What is the amount and character of the gain, loss or income that must be recognized by ParentCo as a result of the distribution of the SubCo stock?

What is the basis in the SubCo’s stock?

When does your holding period for the SubCo stock begin?

If ParentCo was only in business for 3 years and SubCo for only 2 years, would any of the above answers change? Which would change? Why?

Answer 1

What is the amount and character of the gain, loss or income that must be recognized by you as a result of the distribution of the SubCo stock?

Ans

In this scenario the shareholder will recognize loss or gain upon divestiture of Subco stock . The basis of calculation is as under

·         The 1% holding stock basis is $40,000 before divestiture

·         The 25 shares of subco stock after divestiture fair market value is $25,000 against 1% shareholding

Gain /(loss) = FMV after divestiture - Stock basis before divestiture

Gain /(loss) = $25,000 - $40,000

Loss = (15,000)

The shareholder will recognize loss of $15,000

What is the amount and character of the gain, loss or income that must be recognized by ParentCo as a result of the distribution of the SubCo stock?

Ans

In this scenario the ParentCo will recognize loss or gain upon divestiture of Subco stock . The basis of calculation is as under

·         The 99% holding stock basis is $3,960,000 before divestiture ( $40,000 x 99)

·         The 25 shares of subco stock after divestiture fair market value is $25,000 against 1% shareholding and for 99% it will be $2,475,000 ( $25,000 x 99)

Gain /(loss) = FMV after divestiture - Stcok basis before divestiture

Gain /(loss) = $2,475,000 - $3,960,000

Loss = (1,485,000)

The ParentCo will recognize loss of $1,485,000

What is the basis in the SubCo’s stock?

Ans

The basis of subco stock will be

= 1% is $40,000

And 100% will be $4,000,000 ( 4$40,000 x 100)

When does your holding period for the SubCo stock begin?

Ans

As per section 355 , the holding period in subco stock will begin after 12 months from Divestiture is initiated

If ParentCo was only in business for 3 years and SubCo for only 2 years, would any of the above answers change? Which would change? Why?

Ans

In this scenario stock basis would have been calculated on fair market value and shareholders would not recognize any gain or losses on distribution of the SubCo stock