The stock of Cardinal Corporation is held as follows: 90% by Blue Jay Corporation (basis of $500,000) and 10% by Samuel (basis of $70,000).Cardinal Corporation is liquidated in October of the current year, pursuant to a plan adopted earlier in the year.Pursuant to the liquidation, Cardinal Corporation distributed Asset A (basis of $450,000, fair market value of $720,000) to Blue Jay, and Asset B (basis of $45,000, fair market value of $80,000) to Samuel.No election is made under § 338.With respect to the liquidation of Cardinal:
A)Cardinal Corporation recognizes a gain of $35,000.
B)Blue Jay has a basis in Asset A of $720,000.
C)Samuel recognizes no gain (or loss).
D)Blue Jay recognizes a gain of $220,000.
E)None of the above.

Question

Quizplus · Accepted Answer

Cardinal Corporation will recognize a gain of $35,000 ($720,000 FMV of Asset A minus $450,000 basis of Asset A). Blue Jay's basis in Asset A will be $450,000 (the basis of Cardinal in Asset A) increased by the amount of gain recognized by Cardinal ($35,000) plus the fair market value of Asset A ($720,000), for a total basis of $1,205,000. Samuel will recognize a gain of $35,000 ($80,000 FMV of Asset B minus $45,000 basis of Asset B). However, there is no information to support option D, and therefore it is incorrect.

The Stock of Cardinal Corporation Is Held as Follows: 90