Corporation X owns 75 percent of a solvent corporation Y, and individual A owns the remaining 25 percent of Y. As part of a plan to make a QSub election for Y, X causes Y to redeem A’s 25 percent interest on June 1 for cash and makes a QSub election for Y effective on June 3.
The making of the QSub election is considered to be the adoption of a plan of liquidation immediately before the deemed liquidation.
The deemed liquidation satisfies the requirements of section 332, so X does not recognize gain or loss on the deemed liquidation of Y.
Y redeems individual A’s 25 percent interest for cash so that X owns 100 percent of Y before the QSub election takes effect.
Making the QSub election is treated as adopting a plan of liquidation immediately before the deemed liquidation of Y.
The deemed liquidation satisfies section 332, so X recognizes no gain or loss on the deemed liquidation of its wholly owned subsidiary.
The redemption occurs on June 1 and the QSub election is effective on June 3, leaving X as the sole owner before the deemed liquidation.
