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Arnold does not adversely affect the conclusion that MIC had a
controlling interest in SIC immediately after the transfer.
In Rev. Rul. 68-298, 1968-1 C.B. 139, a corporation transferred
property to a newly created subsidiary in exchange for all the stock
of the subsidiary, whereupon the transferor distributed 25 percent of
the transferee corporation’s stock to a shareholder in complete
redemption of the shareholder’s stock in the transferor. The
Commissioner ruled that the transferor had maintained its controlling
interest under section 351(a) and (c), notwithstanding that the
transferor’s remaining interest in the transferee was less than 80-
percent control as defined in section 368(c).
We agree with the conclusion of Rev. Rul. 68-298, supra, which is
consistent with the statutory language of section 351. Section 351(c)
provides that a transferor corporation's subsequent distribution of
transferee stock to its shareholders “shall not be taken into
account”; this means that the transferor will not be deemed to have
relinquished control immediately after the transfer by reason of
having distributed to one or more of its shareholders all or part of
the stock of the transferee, even though the distribution effects a
termination of the shareholder’s interest in the transferor.
b. Distribution of SIC Stock to Arnold in Redemption of
His Stock in Petitioner
While the transfer of assets by MIC to SIC was a nonrecognition
event for Federal income tax purposes, the subsequent distribution of
SIC stock to Arnold by MIC was not. The rules of subchapter C
determine whether and to what extent an S corporation recognizes gain
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