Question 1. Indigo has a basis of $1 million in the stock o

1. Indigo has a basis of $1 million in the stock of Owl Corporation, a subsidiary in which it owns 100% of all classes of stock. Indigo purchased the stock in Owl 10 years ago. In the current year, Indigo liquidates Owl and acquires assets worth $1.2 million. At the time of its liquidation, Owl Corporation had a basis of $800,000 in the assets and E & P of $500,000. Which of the following statements is correct with respect to the liquidation?

a. Owl recognizes a gain of $400,000.

b. Indigo has an $800,000 basis in the assets.

c. Owl’s E & P of $500,000 is eliminated.

d. Indigo recognizes a gain of $200,000.

e. None of the above.

2. The stock of Lavender Corporation is held as follows: 80% by Jade Corporation (basis of $400,000) and 20% by Tiffany (basis of $100,000). Lavender Corporation is liquidated in December of the current year, pursuant to a plan adopted earlier in the year. Pursuant to the liquidation, Lavender Corporation distributed Asset A (basis of $600,000, fair market value of $900,000) to Jade, and Asset B (basis of $250,000, fair market value of $225,000) to Tiffany. No election is made under § 338. With respect to the liquidation of Lavender:

a. Lavender recognizes a loss of $25,000 on the distribution of Asset B.

b. Jade has a basis in Asset A of $900,000.

c. Tiffany has a basis in Asset B of $225,000.

d. Jade recognizes a gain of $500,000.

e. Lavender recognizes a gain of $300,000 on the distribution of Asset A.

recognizes no gain or loss and takes a carryover basis in assets received. Thus, Jade recognizes no gain (option d.) and has a basis in Asset A equal to Lavender’s basis, or $600,000 (option b.). A subsidiary recognizes no gain or loss on liquidating distributions to a parent corporation under § 332; thus, Lavender recognizes no gain on the distribution of Asset A to Jade (option e.).

3. Penguin Corporation purchased bonds (basis of $190,000) of its 100% owned subsidiary, Finch Corporation, at a discount. Pursuant to a § 332 liquidation and in satisfaction of the indebtedness, Finch distributes land worth $200,000 (basis of $160,000) to Penguin. Which of the following statements is correctwith respect to the distribution of land?

a. Neither Finch nor Penguin recognize gain (or loss).

b. Finch recognizes no gain and Penguin recognizes a gain of $10,000.

c. Finch recognizes a gain of $40,000 and Penguin recognizes no gain.

d. Finch recognizes a gain of $40,000 and Penguin recognizes a gain of $10,000.

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