Parent Corporation has owned all 40 shares of Subsidiary Corporation common stock since 2006.

Parent has been in the business of manufacturing and selling light fixtures, and Subsidiary has been in the business of manufacturing and selling light bulbs. Chelsea and Daniel are the two equal shareholders of the Parent stock and have owned their stock since 2006. Chelsea's basis in her 20 Parent shares is $65,000, and Daniel's basis in his 20 Parent shares is $50,000. On April 10, 2013, Parent distributes all

40 Subsidiary shares to Daniel in exchange for all his Parent shares (which are cancelled). The distribution has a bona fide business purpose. The Subsidiary stock had a $5,000 basis to Parent on the distribution date. At the end of 2013, Parent has $110,000 of E&P. Immediately after thedistribution, the FMVs of the Parent and Subsidiary stocks are $3,500 and $2,000 per share, respectively.

A. What are the amount and character of the gain, loss, or income Daniel must recognize as a result of Parent's distributing the Subsidiary stock?

Gain/Loss: ________

Character: (select one)

Capital Gain

Dividend

Return of Capital

N/A

B. What basis does Daniel take in the Subsidiary stock?

C. When does Daniel's holding period for the Subsidiary stock begin? (Select One)

begins day after exchange date

begins day before exchange date

includes his holding period for the Parent stock

D. Assume instead that Kenneth formed Subsidiary in 2009 to manufacture and sell lightbulbs. Kenneth sold the Subsidiary stock to Parent for cash in 2011. How would your answers to Parts ac change?

Gain/Loss: ________

Character: (select one)

Capital Gain

Dividend

Return of Capital

N/A

Basis in Subsidiary Stock: ________

Holding Period Begins: (Select One)

begins day after exchange date

begins day before exchange date

includes his holding period for the Parent stock