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“accumulated excess funds through another corporation to P
shareholders”.12
In this case, the redemption accomplished more than merely
the conversion of indirect to direct control of Sunbelt. It
accomplished the acquisition of control where none had existed
previously. For that reason, it represents, in the language of
the Court of Appeals for the Second Circuit in Commissioner v.
Gordon, 382 F.2d at 506, “the temporary investment of liquid
assets in a new business in preparation for * * * [a spinoff]”.
We hold that, in contrast to the circumstances involved in the
pronouncements cited by petitioners, the distribution within
5 years of the redemption is precisely the type of transaction
section 355(b)(2)(D) is designed to eliminate from nonrecognition
treatment under section 355(a).
III. Conclusion
Respondent’s deficiencies against petitioners are sustained.
Decisions will be entered
for respondent.
12 In Rev. Rul. 74-5, 1974-1 C.B. 82, respondent further
determined that parent distributee’s (P’s) subsequent
distribution of the subsidiary stock to its shareholders, within
the 5-year period, does violate the requirements of sec.
355(b)(2)(D). The prior distribution to P also violates sec.
355(b)(2)(D) as amended by the Revenue Act of 1987, sec.
10223(b), 101 Stat. 1330, supra, and sec. 2004(h)(1) of TAMRA,
supra. As a result, Rev. Rul. 89-37, 1989 C.B. 107, obsoletes
the holding of Rev. Rul. 74-5, supra, with respect to the
distribution to P.
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