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Jefferson Millinery Inc. (JMI) decided to liquidate its wholly owned subsidiary, 8 Miles High Inc. (8MH). 8MH had the following tax accounting balance sheet: (Leave no answer blank. Enter zero if applicable.)
FMV Adjusted Basis Appreciation
Cash $ 265,000 $ 265,000
Building 78,000 34,500 43,500
Land 187,000 120,500 66,500
Total $ 530,000 $ 420,000 $ 110,000
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?

Answer :

a. Since Jefferson Millinery Inc. (JMI) owns 8MH, so it will not recognize any gain or loss on liquidation.

b. $34,500 is the loss recognized by JMI, since JMI owns more than 80% of 8MH, it must recognize any loss or gain from its liquidation.

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

  • Building- $78,000
  • Land- $187,000

                    FMV                 Adjusted Basis       Appreciation

Cash         $265,000           $265,000

Building    $78,000             $34,500                 $43,500

Land         $187,000            $120,500                $66,500

Total         $530,000           $420,000               $110,000

Liquidation is the act of turning assets into cash. For instance, a business closes and sells all of its merchandise because it is bankrupt and is in need of cash.

To learn more about Liquidation here:

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