Tax Research Essay

1075 Words5 Pages
Tax Research Problem 6-59

Parent Corporation owns 85% of the common stock and 100% of the preferred stock of Subsidiary Corporation. The common stock and preferred stock have adjusted bases of $500,000 and $200,000, respectively, to Parent. Subsidiary adopts a plan of liquidation on July 3 of the current year, when its assets have a $1 million FMV. Liabilities on that date amount to $850,000. On November 9, Subsidiary pays off its creditors and distributes $150,000 to Parent with respect to its preferred stock. No cash remain to be aid to Parent with respect to the remaining $50,000 of its liquidation preference for the preferred stock, or with respect to any common stock. In each of Subsidiary’s tax years, less than %10 of its gross
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In a Court-reviewed opinion, we held that the phrase "all its stock" did not include "nonvoting stock which is limited and preferred as to dividends." 27 T.C. at 688. Thus, Hazleton Bakeries' distribution, which was in respect of only the nonvoting preferred stock, was not a distribution in complete cancellation or redemption of all its stock.
The case of H.K. Porter Co., Inc. 87 T.C. 689 (1986) also had a subsidiary liquidate assets and the distribute failed to cover the preferred stock’s liquidation preference. On its 1978 and 1979 Federal income tax returns, petitioner claimed losses with respect to its Porter Australia stock. In his notice of deficiency, respondent disallowed said losses because "under I.R.C. Sec. 332, no gain or loss is recognized on the receipt of property distributed in complete liquidation of a subsidiary corporation." The court ruled in favor of H.K. Porter. “Finally, because we have held that section 332 does not bar the recognition of petitioner's losses, we hold that, based on the record, petitioner is entitled to an ordinary loss of $249,981 in 1978 with respect to the worthlessness of its common stock and a long-term capital loss of $1,957,770 in 1979 with respect to its preferred stock. See sec. 165(a) and (g).”
Like both cases Parent Corporation received assets in a liquidating

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