Parent Corporation owns 85% of the common stock and 100% of the preferred stock of Subsidiary Corporation. Thecommon stock and preferred stock have adjusted bases of $500,000 and $200,000, respectively, to Parent. Subsidiaryadopts a plan of liquidation on July 3 of the current year, when its assets have a $1 million FMV. Liabilities on that dateamount to $850,000. On November 9, Subsidiary pays off its creditors and distributes $150,000 to Parent with respect toits preferred stoclc No cash remains to be paid to Parent with respect to the remaining $50,000 of its liquidationpreference for the preferred stock, or with respect to any of the common stoclc In each of Subsidiary’s tax years, less than10% of its gross income has been passive income. What are the amount and character of Parent’s loss on the preferredstock? The common stock?A partial list of research sources is0 IRC Secs. 165(g)(3) and 332(a)0 Reg. Sec 1.332.2(b)0 Spaulding Bakeries, Inc, 27 T.C. 684 (1957)0 H. K. Porter Co., Inc, 87 T.C 689 (1986)

Liquidating distributions in the problem are made in accordance to the preferred stock Since the activities may not meet the Section 332 requirements, the Section 332 rules will not apply to the case cited in the problem This means, Parent has to recognize a capital loss of 8.50,000 on the distribution The capital loss can only be used to offset capital gains.

Under the Section 165(03) rules for affiliated corporation's worthlessness securities, Parent can recognize an ordinary loss of 8.500,000 on the common stock The ordinary loss can be sued to offset ordinary income.