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Under Rev. Rul. 57-144, 1957-1 C.B. 123, section
355(b)(2)(D) applies to any taxable redemption during the 5-year
period that results in control of the subsidiary by the
distributing corporation. We need not and do not decide whether
we would reach the same result as Rev. Rul. 57-144, supra, in all
such cases. We decide only that we reach the same result under
the circumstances of this case.
2. Additional Arguments
In reaching our decision, we find none of petitioners’
additional arguments persuasive.
a. Active Business Test
Petitioners argue that the fundamental goal of the active
business test is to prevent shareholder withdrawal of accumulated
earnings at capital gain rates, and that, because Ridge’s
accumulated adjustment account under section 1368(e)(1) exceeded
the value of the distributed Sunbelt stock, an otherwise taxable
distribution (including a cash dividend) would not have been
taxable to petitioners. Therefore, petitioners continue, there
could not have been any conversion of ordinary income into
capital gain. Additionally, petitioners argue that the issue in
this case, the taxation of corporate level gain, is not addressed
by section 355(b)(2)(D).
Petitioners’ first argument ignores the fact that, pursuant
to sections 1367(a)(2)(A) and 1368(e)(1)(A), the accumulated
adjustment account is reduced by the amount of the distribution
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