Parent Co sells street vending carts and has been in business for 10 years. The subsidiary, Sub Co, has been in the business of selling refrigerated vending carts for 8 years. Parent Co acquired Sub Co from X-Corp in a single stock class 100% acquisition. Parent Co has divests itself of Sub Co. You are a shareholder who has less than 1% of the Sub Co stock. The stock basis is $40,000. As a result of the divestiture, you receive 25 shares of Sub Co stock. This stock has a $25,000 fair market value. Your Parent Co stock has a fair market value of $75,000 after the divestiture. Parent Co has E&P of $2,500,000 at the end of the year.

a. 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 Sub Co stock?

b. What is the amount and character of the gain, loss or income that must be recognized by Parent Co as a result of the distribution of the Sub Co stock?

c. What is the basis in the Sub Co’s stock?

d. When does your holding period for the Sub Co stock begin?

e. If Parent Co was only in business for 3 years and Sub Co for only 2 years, would any of the above answers change? Which would change? Why?