XYZ Inc. liquidated. Pursuant to the plan of liquidation, ABC Inc., which owned 80% of the stock of XYZ, received as a distribution in exchange for all of its stock in the corporation, 80% of the inventory and other assets of the corporation worth $700,000 that had a basis to the corporation of $900,000. All of the other shareholders received pro rata distributions of these assets and none of these assets had been contributed to the corporation by any shareholder. How much loss was recognized by XYZ, Inc. as a result of this liquidating distribution to XYZ, and what was the character of the gain

In calculating the loss that was recognized by XYZ we subtract the basis of the inventory from the worth of the inventory before it was distributed during liquidation.

This translates to,

= 700,000 - 900,000

= -$200,000

Now as we know, Inventory is a day to day asset in the business that is sold to make profit. Inventory is what was distributed and as such it must be considered an Ordinary Income.

So this is a $200,000 Ordinary Income loss.