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WHEREAS, if corporation continues to wholly own
Sunbelt subsequent to the redemption, Sunbelt and
Corporation will be prohibited from electing or
maintaining their respective Subchapter S status for
Federal tax purposes and for purposes of the income tax
imposed by the State of Florida * * *
Funding the Redemption
Sunbelt needed cash in the amount of $828,243.74 to fund the
redemption. Although Sunbelt had assets and accumulated earnings
in excess of that amount, it did not have the necessary cash. On
January 14, 1993, the amount available to Sunbelt pursuant to the
1989 note was increased from $2 million to $3 million, and, on
that same date, Sunbelt took advantage of its increased borrowing
power under the 1989 note and borrowed $900,000 from Ridge,
which, in part, it used to make the redemption.
OPINION
I. Introduction
The fundamental question we must answer is whether gain
is to be recognized to Ridge on account of the distribution.
If so, then, since, for Ridge’s taxable year ending July 25,
1993, it was an S corporation, petitioners must take into account
their pro rata shares of such gain. See sec. 1366(a). No gain
will be recognized to Ridge on account of the distribution if
that transaction qualifies for nonrecognition treatment pursuant
to section 355. The pertinent provisions of section 355(a) and
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