Question

Company Y is liquidating. It is wholly owned by X Company (which has a $10,000 a/b in the Company Y shares). It plans to distribute the following assets (all held for 8 years) to Company X.

                                                      A/B                 FMV

         Cash                                     2,000               2,000

         Inventory                             8,000               6,000

         Goodwill                              1,000               2,000

         Gain/Loss to Company Y: ________________________________________

         Gain/Loss to Company X: ______________________________________________

         Adjusted basis Company X will have in the inventory: ______________________

Answer 1

No gain or Loss on the liquidation of the Subsidiary is recognised if all the following conditions sre fulfilled-

1.Parent Must hold atleast 80% of the voting power in the subsidiary

2.Subsidiary shall distribute all the assets on liquidation

3.Subsidiary must be solevent. Means subsidiary assets should be more than its liability.

In the given case all the above 3 conditions are fulfilled.

Hence neither the parent company, nor the subsidiary company should recognise Gain/ loss on the liquidation of the subsidiary.

-All the assets to be shown by the parent at its book value.

Gain/Loss to Company Y	Nil
Gain/Loss to Company X	Nil
Adjusted basis Company X will have in the inventory	Inventory to be shown in the basis of Book value on the date of liquidation. i.e it is to be shown at $8000