Spacely Space Sprockets, Inc. was incorporated in Arkansas, and it has filed consolidated federal income tax returns as the parent corporation of an affiliated group of corporations since 1988. It is an accrual-basis, calendar year corporation.  As of January, 2014, Spacely Space Sprockets, Inc. owned the entire outstanding stock of an intermediate holding company, Acme North America, Inc., which in turn owned the entire stock of a number of subsidiaries, including Cogswell’s Cosmic Cogs. 


Cogswell’s Cogs had a deficit in its earnings and profits of $3 million as of January 1, 2014.  Acme’s  basis in the stock of Cogswell’s Cogs was $16.1 million at the start of the year.


On December 11, 2014, as a part of a restructuring of Spacely Space Sprockets’ consolidated group, and for good business purposes, Acme distributed the stock of Cogswell’s Cogs to Spacely Space Sprockets. The distribution of Cogswell’s Cogs on December 11, 2014 qualified as a tax-free spin-off under section 355 of the Code.


Cogswell’s Cogs made distributions during 2014 prior to the spin-off of $8.9 million. Of this, $5.3 million was from its current earnings and profits. The excess of such distributions over the earnings and profits accruing during 2014 was treated as return of capital, reducing Acme’s basis in the Cogswell’s Cogs stock to $12.5 million.


On December 11, 2014, prior to the spin-off, Spacely Space Sprockets’ basis in Acme was $191 million.  Acme had accumulated Earnings and Profits of $62 million prior to the spin-off.  As noted above, Cogswell’s Cogs had a deficit in Earnings and Profits.


An appraisal indicates that the value of the Acme stock immediately after the spin-off was $150 million and the value of the Cogswell’s Cogs stock immediately after the spin-off was $80 million.



What basis does Spacely Space Sprockets take in the Cogswell’s Cogs stock?  What is Cogswell’s Cogs’ E&P after the spin-off?

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