Taxation (4)

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ParentCo sells street vending carts and has been in business for 10 years. The subsidiary, SubCo, has been in the business of selling refrigerated vending carts for 8 years. ParentCo acquired SubCo from X-Corp in a single stock class 100% acquisition. ParentCo has divests itself of SubCo. You are a shareholder who has less than 1% of the SubCo stock. The stock basis is $40,000. As a result of the divestiture, you receive 25 shares of SubCo stock. This stock has a $25,000 fair market value. Your ParentCo stock has a fair market value of $75,000 after the divestiture. ParentCo has E&P of $2,500,000 at the end of the year.
1. What is the amount and character of the gain, loss or income that must be recognized by you as a result of the distribution of the SubCo stock?
2. What is the amount and character of the gain, loss or income that must be recognized by ParentCo as a result of the distribution of the SubCo stock?
3. What is the basis in the SubCo’s stock?
4. When does your holding period for the SubCo stock begin?
5. If ParentCo was only in business for 3 years and SubCo for only 2 years, would any of the above answers change? Which would change? Why?

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