Question

DC (a public company) owns CFC, which has $200 of good earnings (earnings not from subpart F income). Let's say that CFC has $200 of cash from the $200 earnings.

(a) What is the result if CFC used its $200 of earnings to purchase $200 of DC stock from the public?

(b) What is the result if CFC forms a new CFC2 in the Bahamas and transfers the $200 to CFC2 in a section 351 exchange and then CFC2 purchases the DC stock? Assume that CFC2 has no earnings for its first year.

Answer 1

DC owns cfc which has $200

A)cfc earnings used to purchase stock - this CFC earnings is also called as subpart F income.where DC companies CFC earnings used to purchase stock from public.in this case 50% of the Cfc s stock deducted by its value or it controls 50% of cfc stock by its value.

B) cfc forms a new cfc2 in the bahamas and tranfers the $200 to cfc2 in section 351 exchange and then cfc2 purchases the dc stock.In this case gain or loss is not recognised in transfer and exchange.it wil be cosider as a tax free exchange. If cfc forms transfered to cfc 2 in section 351 exchange it wil come under nonrecognition requirement of 351 tax free exchange.the rule in 351 exchange tax free is either the stock of transferree should receive in transaction or 50%of of total voting power should be there in aggregate by US shareholders..