Question

Your client, White Corporation, has done well since its formation 20 years ago. This year, it recognized a $50,000,000 capital gain from the sale of a subsidiary. White’s CEO has contacted you to discuss a proposed transaction to reduce the tax on the capital gain. Under the proposal, White will purchase all of the common stock in Purple Corporation for $200,000,000. Purple is a profitable corporation that has $63,000,000 in cash and marketable securities, $137,000,000 in operating assets, and approximately $280,000,000 in E & P. After its acquisition, Purple will distribute $50,000,000 in cash and marketable securities to White. Due to the 100% dividends received deduction, no taxable income results to White from the dividend. White will then resell Purple for $150,000,000. The subsequent sale of Purple generates a $50,000,000 capital loss [$200,000,000 (stock basis) - $150,000,000 (sales price)]. The loss from the stock sale can then be used to offset the preexisting $50,000,000 capital gain. Will the proposed plan work? Why or why not?

Partial list of research aids:

§ 1059.

Could you post a new explanation for 2020 (please don't copy from the old post)?

Answer 1

Answer :

• The plan proposed by White Corporation does not work.
• Because As per code Section ,

A corporate shareholoder who recieves extraordinary dividend from subsidary with in first 2 years.

Basis on such shareholders , Subsidary should be reduced by amount of dividend paid  

• So, White corporation's stock of $200 million will be reduced by amount of dividend recieved.
• At the Final sale , there will be No Corresponding Capital Loss .
• So the Proposal will be rejected.

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