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qualify for section 355 nonrecognition treatment, then gain will
be recognized to Ridge pursuant to section 311(b).4 Moreover,
the parties have stipulated that, if the distribution does not
qualify for section 355 nonrecognition treatment, the
deficiencies determined by respondent with respect to petitioners
are correct. Respondent argues that the distribution does not
3(...continued)
* * * * * * *
(c) Taxability of Corporation on Distribution.--
(1) In general.--* * * no gain or loss shall
be recognized to a corporation on any distribution
to which this section * * * applies and which is
not in pursuance of a plan of reorganization.
4 Sec. 311(b) generally provides for a distributing
corporation’s recognition of gain on its distribution of
appreciated property "as if such property were sold to the
distributee at its fair market value." Sec. 311(b) only applies
to a corporate distribution of appreciated property to which
subpart A (secs. 301-307) applies. Sec. 355(a)(1), if applicable
to this case, would provide an exception to dividend treatment
under sec. 301 and, therefore, an exception to the application of
sec. 311(b). See sec. 355(c)(3).
We note, in passing, that, because Ridge’s S corporation
election was made on, not after, Dec. 31, 1986, sec. 1374, as
amended by the Tax Reform Act of 1986 (TRA of 1986), Pub. L.
99-514, 100 Stat. 2085, does not apply to tax the alleged sec.
311(b) gain to Ridge. See TRA of 1986 sec. 633(b); Rev. Rul. 86-
141, 1986-2 C.B. 151, 152. Sec. 1374 requires that "built-in
gain" be taxed directly to an S corporation. The pre-TRA of 1986
version of sec. 1374 applied only during the first 3 years (not
the first 10 years as under the amended provision) for which an
S corporation election was in effect. See former sec.
1374(c)(1). For Ridge, the applicable years were its 1988-90
taxable years. Therefore, any taxable gain to Ridge arising out
of the Jan. 15, 1993, distribution of the Sunbelt stock would not
be subject to former sec. 1374. Such gain would be directly
taxable to the petitioner-shareholders pursuant to sec. 1366(a).
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