Indigo Has a Basis of $1 Million in the Stock

Multiple Choice

Indigo has a basis of $1 million in the stock of Owl Corporation, a subsidiary in which it owns 100% of all classes of stock. Indigo purchased the stock in Owl 10 years ago. In the current year, Indigo liquidates Owl and acquires assets worth $1.2 million. At the time of its liquidation, Owl Corporation had a basis of $800,000 in the assets and E & P of $500,000. Which of the following statements is correct with respect to the liquidation?

A) Owl recognizes a gain of $400,000.
B) Indigo has an $800,000 basis in the assets.
C) Owl's E & P of $500,000 is eliminated.
D) Indigo recognizes a gain of $200,000.
E) None of the above.