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the section 357(c) gain on the distributing corporation’s
incorporation of an existing business.11
In Rev. Rul. 69-461, supra, respondent determined that a
distribution by a subsidiary to its parent of the stock of the
former’s subsidiary, within 5 years of the first-tier
subsidiary’s purchase of such stock, does not violate section
355(b)(2)(D). Respondent reasoned that section 355(b)(2)(D) is
not intended to apply to a distribution “that merely has the
effect of converting indirect control into direct control”, but,
rather, “applies to a transaction in which stock is acquired from
outside a direct chain of ownership.” Rev. Rul 69-461, 1969-2
C.B. at 53. Similarly, in Rev. Rul. 74-5, 1974-1 C.B. 82
(discussed by both parties), the parent distributee (P) purchases
the stock of the subsidiary distributor less than 5 years prior
to the latter’s distribution of an operating subsidiary that it
had owned for more than 5 years. Respondent determined that that
conversion of P’s indirect control into direct control of the
distributed subsidiary within the 5-year period did not violate
section 355(b)(2)(D) because there is no passthrough of P’s
11 Sec. 1.355-3(b)(4)(iii), Income Tax Regs., applicable
to acquisitions prior to the Revenue Act of 1987, Pub. L. 100-
203, 101 Stat. 1330, and the Technical and Miscellaneous Revenue
Act of 1988, Pub. L. 100-647, 102 Stat. 3342, also provides that
sec. 355(b)(2)(C) and (D) does not apply to an acquisition of
assets or stock by one member of an affiliated group from another
member of the same group, even if the acquisition is taxable.
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