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preferred stock from shareholders of both common and preferred,
in connection with the acquisition of all of the common stock in
a tax-free reorganization under section 368(a)(1)(C), is taxable
to the shareholders under section 302 as a transaction separate
from the reorganization. The cash is not “boot” taxable to the
shareholders under section 356. In both of the G.C.M.’s, Counsel
explicitly bases his determination on the fact that the acquired
corporation used its own funds for the redemption. Although the
issue of which corporation provided the funds for the redemption
was not specifically addressed in Rev. Rul. 55-440, supra, it
appears that such funds were, in fact, provided by the acquired
corporation. We find that that feature, among others, of all
three of the pronouncements distinguishes their facts from the
facts of this case.
The other authorities relied upon by petitioners are also
distinguishable because, in each, either the taxable acquisition
(or incorporation) of the subsidiary to be spun off within the
5-year period or the spinoff itself less than 5 years after a
taxable purchase of the subsidiary occurred within the context of
an affiliated group of corporations. Thus, Commissioner v.
Gordon, supra, involves a subsidiary spun off within 5 years of
its incorporation in a transaction involving the receipt of
“boot” (a demand note) taxable to the transferor parent. The
Court of Appeals for the Second Circuit held that the section
355(b)(2)(C) and (D) prohibition against acquiring a business or
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