Parent Corporation has been in the business of manufacturing and selling trucks for the past eight years. Its subsidiary, Diesel Corporation, has been in the business of manufacturing and selling diesel engines for the past seven years. Parent acquired control of Diesel six years ago when it purchased 100% of its single class of stock from Large Corporation. A federal court has ordered Parent to divest itself of Diesel pursuant to an antitrust ruling. Consequently, Parent distributes all its Diesel stock to its shareholders. Alan owns less than 1% of Parent’s outstanding stock having a $40,000 basis. As a result of Parent’s distribution, he receives 25 shares of Diesel stock having a $25,000 FMV. Parent distributes no cash or other assets. Parent’s E&P at the end of the year in which the spinoff occurs is $2.5 million. The Parent stock held by Alan has a $75,000 FMV immediately after the distribution.
a. What are the amount and character of the gain, loss, or income Alan must recognize as a result of Parent’s distributing the Diesel stock?
b. What basis does Alan take in the Diesel stock he receives?
c. When does Alan’s holding period for the Diesel stock begin?
d. What amount and character of gain or loss does Parent recognize on the distribution?
e. How would your answer to Part a change if Parent had been in the truck business for only three years before the distribution, and it had acquired the Diesel stock in a taxable transaction only two years ago?