ParentCo sells vending carts and has been in business for 10 years. The subsidiary, SubCo, has been
Question:
ParentCo sells vending carts and has been in business for 10 years. The subsidiary, SubCo, has been in the business of selling refrigerated carts for 8 years. You are a 50% partner of ParentCo with John. The basis of your shares is $80,000 while John’s basis is $60,000. On April 9, 20x1, ParentCo allocated 100% of SubCo stock to shareholder John in exchange for John’s ParentCo shares. John’s ParentCo shares are subsequently cancelled. There is a bona fide business purpose for this exchange. At the end of 20x11, ParentCo has $150,000 of E&P. The fair market value of ParentCo stock is $3,000/share and the fair market value of SubCo is $1,000/share.
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?
2) What is the amount and character of the gain, loss or income that must be recognized by ParentCoas a result of the distribution of the SubCo stock?
3) What is John’s basis in the SubCo's stock?
4) When will John’s holding period for the SubCo stock begin?
Intermediate Accounting
ISBN: 978-0324300987
10th Edition
Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones