 Hello, and welcome to this session. This is Professor Farhad. In this session, we're gonna keep working with complete corporate liquidation. Specifically, we're gonna look at a parent subsidiary scenario. This topic is covered in a corporate income tax course, the CPA exam regulation section. As always, please connect with me only then. YouTube is where you would need to subscribe. I have over 1,500 plus accounting, auditing, and tax lectures. If you like my lectures, please like them, share them, put them in playlist. Let the world know about them. If you're benefiting from my channel, it means others might benefit, so please share the wealth. This is my Instagram account, this is my Facebook account, and this is my website. On my website, if you choose to donate and support the channel, you can do so, or you can get in touch with me. So in this section, we're gonna keep working with the corporate liquidation, and in the prior sessions, we looked at losses for related parties. This allowed losses. We looked at losses of built-in losses, and both of these rules, we called them the anti-stuffing rule. In this session, we're gonna be looking at the subsidiary corporation. The subsidiary corporation does not recognize gain or losses on liquidating distribution to its parent company. This is when the subsidiary, when the parent buys the subsidiary, or basically the subsidiary liquidate into the parent. In form, it's a liquidation. In substance, it's the same entity. Basically, the two entities merge together, so nothing really happened. And in the following session, we would look at subsidiary corporation does not recognize loss on liquidating distribution to minority shareholder would look at this separately. So let's go ahead and start to look at liquidation between a parent and subsidiary. What is the general rule? The parent does not recognize gain or loss on the liquidation. Simply put, in substance, nothing really happened. All what we did is we took one corporation and merged it into another one. So in substance, there is really no change, okay? Also, the subsidiary recognized no gain or losses on the distribution to its parent. As long as we have certain qualification, the parent must own at least 80% of the voting stock and the value of the subsidiary stock. So the parent has to own 80% of the voting. Subsidiary must distribute all property in complete cancellation of its stock within the taxable year or within three years from the close year in which first distribution occurs. So you have three years to complete the distribution. And very important, the subsidiary must be solvent. In other words, they have more assets than liabilities. Now, if they are not solvent, if they are unsolvent, the parent will have to recognize a loss because they are taken on a loss. If these requirements are met, requirement one, two, and three, well, non-recognition is mandatory. They cannot recognize a gain or a loss. Now, if the subsidiary is unsolvent, the parent will recognize ordinary loss. We don't have to worry about this. Now, what is the basis to the parent company? Well, the basis is the same. Property received by the parent and the complete liquidation of the subsidiary has the same basis as in the hands of the subsidiary unless we elect to choose section 338, which I may or may not cover section 338, generally speaking, the same basis. I mean, hopefully this makes sense to you because if it's the same company, nothing should change. Basically, what we're doing is we're going from one company and basically think of it of changing the name of the company, although we're not really changing the name, but think of a merger as the company used to be called A and now it's called B, but it's the same company. All what it did is we merged it into the parent company. Let's look at an example to illustrate this concept. Goose Corporation has a basis of 2.4 million in the stock of Swift Corporation, a wholly owned subsidiary acquired 30 years ago. So 30 years ago, Goose paid 2.4 million, that's their basis and they bought Swift Corporation. Goose liquidates Swift Corporation and receive the asset that are worth 2 million have a basis of 1.7. So what happened is they decided to liquidate the Swift. So just kind of this is the parent, G is the parent and Swift is the subsidiary. So this is the subsidiary and this is the parent. So they invested 2.4 million to buy the company 20 years ago and now they're basically getting rid of this company. So getting rid of this company means what? It means all the assets in this company will transfer to this. Now the assets are worth 2 million. So Swift company, if we look at their assets, we look at book value, fair market value. If we look at their book value, their book value 1.7, their fair market value is two. Now when we transfer the assets from Swift to Goose, what are we gonna transferring? What did we say? We say we're gonna be using the basis. The basis will carry. The basis will carry, therefore it's gonna be 1.7. Let's look at the question first. Determine Goose Corporation recognize gain or loss on the liquidation? But hold on a second. Do we have any recognized gain or recognized loss and the answer is no. Why? Because this is a parent, a subsidiary parent subsidiary liquidation. You don't recognize a gain or a loss. And we're assuming that Swift is solvent and we're assuming we own actually 100%. So we meet all the requirements. Determine Goose Corporation basis and the asset received. So when the asset goes from Swift to Goose, when those assets goes from Swift to Goose, how do we report them? Well, we report them at carry over basis. That means we report them at 1.7. We report them at 1.7 million. Okay, and basically this company is gone. Okay, we liquidate it. So that's the question, no recognized gain, no recognized loss and the basis will carry from Swift to Goose at carry over basis. If you have any questions, any comments about this topic, please email me. If you happen to visit my website for additional lectures, please consider donating. In the next session, I would look at distribution to minority shareholders. And if you're studying for your CPA exam, as always, study hard, it's worth it. Good luck and see you on the other side of success.