Sweet and Salty corp is a holding company (HoldCo) with two subsidiaries. One sub (Salty) produces salty snacks and the other (Sweet) produces healthy sweet soft drinks. Tastebud an individual owns 60% of HoldCo. In which she has a basis of $6,000. She feels that the emphasis on healthy food is causing Hold Co’s stock to be depressed in value. She proposes that Hold Co distribute Salty to the shareholders ratably so that each shareholder will own their proportionate amount of each company. Hold Co’s basis in Salty is $25. HoldCo distributes the shares of Salty and Taste receives 60 of the 100 shares of Salty. Immediately after the distribution Tastebud’s Salty shares are worth $30,000 and her Sweet shares are worth $70 000.

1. Does the distribution cause HoldCo to recognize gain or loss (the total value of the Salty shares distributed was $50,000) if so how much and if not, why not?

2. How much if any gain or loss does Tastebud recognize on receipt of the Salty shares?

3. What is Tastebud’s adjusted basis in the Salty shares received?