Jefferson Millinery Inc. (JMI) decided to liquidate its wholly owned subsidiary, 8 Miles High Inc. (8MH). 8MH had the following tax accounting balance sheet:

FMV Adjusted Basis Appreciation

Cash $200,000 $200,000

Building 50,000 10,000 $40,000

Land 150,000 200,000 (50,000)

Total $400,000 $410,000 $ (10,000)

a. What amount of gain or loss does 8MH recognize in the complete liquidation?

b. What amount of gain or loss does JMI recognize in the complete liquidation?

c. What is JMI's tax basis in the building and land after the complete liquidation?

a. What amount of gain or loss does 8MH recognize in the complete liquidation?

8MH cannot recognize any gain or loss from the liquidation.

b. What amount of gain or loss does JMI recognize in the complete liquidation?

$10,000 loss. Since JMI owns more than 80% of 8MH, it must recognize any loss or gain from its liquidation.

c. What is JMI's tax basis in the building and land after the complete liquidation?

Since 8MH is being liquidated, its assets will be distributed to JMI at fair market value:

Building $50,000 Land $150,000

Explanation:

FMV Adjusted Basis Appreciation

Cash $200,000 $200,000

Building $50,000 $10,000 $40,000

Land $150,000 $200,000 ($50,000)

Total $400,000 $410,000 ($10,000)