Question

On April 27, 2017, Auk Corporation acquires 100% of the outstanding stock of Amazon Corporation (E & P of $750,000) for $1.2 million. Amazon Corporation has assets with a fair market value of $1.4 million (basis of $800,000), no liabilities, and no loss or tax credit carryovers. Amazon Corporation’s tax rate is 34%. Auk Corporation files a timely § 338 election. Assume that both the aggregate deemed sale price (ADSP) and adjusted grossed-up basis (AGUB) are $1.4 million. a. What are the tax consequences of the § 338 election to Amazon Corporation and to Auk Corporation? b. Assume that Amazon Corporation is liquidated immediately following the § 338 election. What are the tax consequences of the liquidation to Amazon Corporation and to Auk Corporation?

Answer 1

a. Tax consequence for Amazon Corporation:

Sale Value: $ 1.40 million, Basis: $ 0.80 million. Recognized Gain = $ 0.60 million. Tax consequence: $ 0.60 million x 34% = $ 204,000. Thus tax conseuqnce for Amazon would be tax liability of $ 204,000 if he elects $ 338.

Tax consequence for Auk Corporation:

There will be no tax consequence and their basis would remain unchanged at $ 1.20 million

b. Tax consequence for Amazon Corporation:

There will be no gain or loss on liquidation because it would be $ 332 parent subsidiary liquidation

Tax consequence for Auk Corporation:

There will no gain or loss. However, Auks basis would step up to $ 1.40 million and holding period would begun from April 27, 2017.