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In this case, all of the cash needed to accomplish the
redemption came directly from Ridge, the parent distributing
corporation. On January 14, 1993, Sunbelt borrowed $900,000 from
Ridge. On the following day, Sunbelt redeemed all of Hutto’s
stock for $828,943.75, in cash, plus real estate with a value of
$101,000. Petitioners specifically acknowledge that Sunbelt
lacked sufficient liquidity to fund the redemption and,
therefore, needed to borrow the necessary funds. Although, as
petitioners point out, Sunbelt might have borrowed the funds from
a third-party lender, it did not. Moreover, the negotiations
between Hutto and Ridge prior to the redemption, whereby the two
parties sought to terminate their joint ownership of Sunbelt by
having one buy the stock of the other, clearly indicate that
Ridge was the motivating force for the buyout of Hutto’s interest
in Sunbelt and that Sunbelt was, in effect, serving Ridge’s
purpose in accomplishing this goal. Any distinction between that
series of transactions and an outright purchase of the stock by
Ridge, the distributing corporation, is illusory for purposes of
section 355(b)(2)(D)(ii).8
8 See Waterman S.S. Corp. v. Commissioner, 430 F.2d 1185
(5th Cir. 1970), revg. 50 T.C. 650 (1968), in which the court
held that, where a subsidiary-payor distributed a promissory note
to its shareholder-payee in the form of an intercompany dividend,
the payor’s discharge of the note with funds borrowed from the
purchaser of the payor’s stock from the payee was, in substance,
the purchaser’s payment of additional purchase price for the
stock.
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