Question

Jefferson Millinery Inc. (JMI) decided to liquidate its wholly owned subsidiary, 8 Miles High Inc. (8MH). 8MH had the following tax accounting balance sheet:
FMV Adjusted Basis Appreciation
Cash $200,000 $200,000
Building 50,000 10,000 $40,000
Land 150,000 200,000 (50,000)
Total $400,000 $410,000 $(10,000)
a. What amount of gain or loss does 8MH recognize in the complete liquidation?
b. What amount of gain or loss does JMI recognize in the complete liquidation?
c. What is JMI's tax basis in the building and land after the complete liquidation?

Answer 1

Answer:

a. What amount of gain or loss does 8MH recognize in the complete liquidation?

• 8MH cannot recognize any gain or loss from the liquidation.

b. What amount of gain or loss does JMI recognize in the complete liquidation?

• $10,000 loss. Since JMI owns more than 80% of 8MH, it must recognize any loss or gain from its liquidation.

c. What is JMI's tax basis in the building and land after the complete liquidation?

Since 8MH is being liquidated, its assets will be distributed to JMI at fair market value:

• Building $50,000
• Land $150,000

Explanation:

                              FMV       Adjusted Basis      Appreciation

Cash               $200,000      $200,000

Building            $50,000         $10,000               $40,000

Land                $150,000      $200,000             ($50,000)      

Total               $400,000       $410,000              ($10,000)