P, Inc. (“P”) owns 90 percent of the outstanding stock of S, Inc. (“S”). Individ
ID: 328766 • Letter: P
Question
P, Inc. (“P”) owns 90 percent of the outstanding stock of S, Inc. (“S”). Individual (“I”) owns the remaining 10 percent of S. P’s basis in its S stock is $3,000. I’s basis in his S stock is $200. S has accumulated earnings and profits of $2,000 and the following assets:
Asset Adjusted Basis FMV
Land $3,000 $8,000
Equipment 2,500 1,000
Inventory 100 1,000
Questions: S wishes to liquidate and distribute all of its assets to its shareholders. What are the tax consequences to P, S and I in the following alternative situations?
a) S distributes the inventory to I and other assets to P.
b) S distributes the equipment to I and the other assets to P. How might S improve this result?
c) What result in (b), above, if P’s basis in its S stock were $30,000 and S had a $30,000 basis in the land?
d) Is (c), above, a situation where P might wish to avoid the application of § 332? Why? How might this be accomplished? Consider in this regard the § 332 qualification requirements and how a parent might assure that they are not met.
Explanation / Answer
ANSWER:A. Stock basis: $10,000; building basis: $10,000. Total basis in stock before redemption 20000 Basis transferred thro' building 10000 So,Fred’s basis in his remaining stock after the redemption, 20000-10000 10000
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