The Friar Corporation is the parent entity in a Federal consolidated group for corporate income tax purposes. It has a $3 million basis in the stock of its wholly owned subsidiary, Abbey, Ltd. This year, Abbey reports a $4 million taxable loss.
a. What is Friar's basis in the Abbey stock after accounting for this operating loss?
b. Friar is considering a sale of the Abbey stock, as prospects for Abbey's future earnings are not encouraging. Comment on the tax consequences that would result if this sale occurs as they pertain to the stock basis computations.