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return regulations then in effect, the cross-chain sale
and the related dividend generated an increase in
MLCR’s basis in MLL’s stock, enabling P to sell MLL
outside the consolidated group at a loss.
On the date of the 1986 cross-chain sale, P had
identified the prospective purchaser of MLL, had
negotiated a tentative purchase price for MLL, and
clearly intended to sell MLL outside the consolidated
group, thereby terminating MLL’s constructive ownership
under sec. 318, I.R.C., of Merlease, the issuing
corporation.
On its consolidated tax return for TYE Dec. 26,
1986, P claimed a loss from the sale of MLL after
treating the gross sale proceeds as a dividend and
increasing its basis in MLL’s stock by that amount.
1987 Transactions: P decided to sell the leased
properties business of MLCR, its wholly owned
subsidiary. Because P wanted to retain MLCR’s
nonleasing assets (the 1987 retained assets) while
minimizing or eliminating gain on the sale of MLCR
outside the consolidated group, P adopted and
implemented a plan consisting of the following steps:
(1) MLCR identified the subsidiaries holding the 1987
retained assets (MLBFS, MLPC, MLVC, MLEI, MLRDM, MLI,
MLLE); (2) MLCR then sold the seven subsidiaries to
three sister corporations (MLRI, MLPFS, MLAM) within
the consolidated group in transactions that qualified
as sec. 304, I.R.C., deemed redemptions; (3) MLCR then
distributed dividends of the gross sales proceeds to
its parent, MLCMH, a wholly owned subsidiary of MP; (4)
P then completed the sale of MLCR to a third party.
Under the consolidated return regulations then in
effect, the cross-chain sales and related dividends
generated increases in MLCMH’s basis in MLCR’s stock,
enabling P to sell MLCR outside the consolidated group
at a loss.
On the dates of the first seven of the 1987 cross-
chain sales, P had identified the purchaser of MLCR,
had prepared a draft acquisition agreement, and clearly
intended to sell MLCR outside the consolidated group,
thereby terminating MLCR’s constructive ownership under
sec. 318, I.R.C., of the subsidiaries sold cross-chain
(the issuing corporations).
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