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Parent Corporation owns 85% of the common stock and 100% of the preferred stock of Subsidiary Corporation. The common stock and preferred stock have adjusted bases of $500,000 and $200,000, respectively, to Parent. Subsidiary adopts a plan of liquidation on July 3 of the current year, when its assets have a $1 million FMV. Liabilities on that date amount to $850,000. On November 9, Subsidiary pays off its creditors and distributes $150,000 to Parent with respect to its preferred stock. No cash remains to be paid to Parent with respect to the remaining $50,000 of its liquidation preference for the preferred stock, or with respect to any of the common stock. In each of Subsidiary’s tax years, less than 10% of its gross income has been passive income. What are the amount and character of Parent’s loss on the preferred stock? The common stock? Partial list of resources is: IRC Secs. 165(g)(3) and 332(a) Reg. Sec. 1.332-2(b) Spaulding Bakeries, Inc., 27 T. C. 684 (1957) H. K. Porter Co., Inc., 87 T. C. 689 (1986)
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