Jane owns 150 of the 200 outstanding shares of Parent Corporation stock. Parent owns 160 of the 200 outstanding shares of Subsidiary Corporation stock. Jane sells 50 shares of her Parent stock to Subsidiary for $40,000. Jane’s basis in her Parent shares is $15,000 ($100 per share). At the end of the year of sale, Subsidiary and Parent have E&P of $60,000 and $25,000, respectively.
a. What are the amount and character of Jane’s recognized gain or loss on the sale?
b. What is Jane’s basis in her remaining shares of Parent stock?
c. How does the sale affect the E&P of Parent and Subsidiary?
d. What basis does Subsidiary take in the Parent shares it purchases?
e. How would your answer to Part a change if Jane instead sells 100 of her Parent shares to Subsidiary for $80,000?