Question

Corporation W owns 100% of the common stock of Corporation Z with a basis of $300. Z owns a rental building (its only asset) with a gross fair market value of $3,000, subject to a non-recourse mortgage of $1,200. Z’s adjusted basis for this building is $900. Z has $600 of E&P. Z is on the accrual method of accounting and reports on the calendar year. Z and W do not report on a consolidated basis. Z distributes the building to W in complete liquidation and W sells the building to Corporation V for $1,800 cash, subject to the debt.

a. W recognizes no gain on the liquidation under Section 332.

b. Z has gain on the liquidation under Section 336.

c. W would recognize no gain on the sale to V.

d. None of the above.

e. None of the above.

Answer 1

Under the given circumstances, W will not recognize any gain on the liquidation under Section 332 according to which no gain or loss should be recognized by the parent company on receipt of property from its subsidiary in complete liquidation. However, Z will recognize a gain on the liquidation under Section 336 because the non-recourse mortgage on the building is greater than Z's basis.

Therefore, both the options a and b are correct.

However, if only one option has to be chosen from the given, option a should be chosen.