X owns 100 percent of Y stock with a basis of $100. Y owns a rental building (its only asset) with a gross FMV of $1,000 and subject to a $400 nonrecourse mortgage. Y's AB in the building is $300, and it has $200 of E&P. X sells its Y stock to Z for $600, and Z then liquidates Y. What are the tax consequences to the parties?

Should Z make a sec. 338 election instead of liquidating Y? Was Z wise to agreeing to this deal under the original facts? Would you have recommended differently? Assume that the tax rate is 35%.