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by reason of transactions in which gain or loss was not
recognized in whole or in part, or only by reason of such
transactions combined with acquisitions before the beginning of
such period." Sec. 355(b)(2)(D)(ii).
B. Arguments of the Parties
Respondent does not dispute that both Ridge and Sunbelt were
engaged in the active conduct of a trade or business immediately
after the distribution. Nor does he dispute that both businesses
had been actively conducted throughout the 5-year period.
Respondent argues, however, that Ridge violated the conditions of
section 355(b)(2)(D)(ii) because it acquired control of Sunbelt
within the 5-year period in a transaction (the redemption) in
which gain or loss was recognized.7 In reaching that conclusion,
respondent relies upon the statutory language and upon Rev. Rul.
57-144, 1957-1 C.B. 123, in which respondent determined that a
personal holding company’s distribution to its shareholders of
the stock of one of its two controlled operating subsidiaries
does not qualify as a tax-free spinoff where control of the
7 It appears from the record that Hutto’s basis in his
Sunbelt stock was his initial investment of $66,667 (one-third of
the total initial shareholder investment of approximately
$200,000). Thus, Hutto’s gain on the redemption was
approximately $863,276.75 ($929,943.75 redemption price less
$66,667 stock basis). Petitioners have not assigned error to
respondent’s finding that petitioners together realized and had
recognized to them the same amount of gain on Ridge’s same-day
distribution to them of the same number of Sunbelt shares as were
redeemed from Hutto, assuming sec. 355 is inapplicable to such
distribution.
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