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After the first seven of the 1987 cross-chain
sales had closed and shortly before the sale of MLCR
was scheduled to close, the purchaser of MLCR notified
P that it could not own VL, one of MLCR’s subsidiaries
because of Federal law restrictions. Approximately 2
weeks before the sale of MLCR closed, MLCR sold the
stock of VL to MLAM, a sister corporation, in a
transaction that qualified as a deemed sec. 304,
I.R.C., redemption.
On its consolidated income tax return for TYE
Dec. 26, 1987, P claimed a loss of $466,985,176 from
the sale of MLCR after treating the gross sales
proceeds from the 1987 cross-chain sales as a dividend
and increasing its basis in MLCR’s stock by that
amount.
Respondent determined that the nine cross-chain
sales of Merlease, MLBFS, MLPC, MLVC, MLEI, MLRDM, MLI,
MLLE, and VL (the subsidiaries) and the sales of MLL
and MLCR outside the consolidated group were parts of a
firm, fixed, and clearly integrated plan to completely
terminate MLL’s and MLCR’s actual and constructive
ownership of the subsidiaries. Petitioner contends
that each cross-chain sale resulted in the receipt of a
dividend by the selling corporation under secs. 302(d)
and 301, I.R.C., equal to the gross sale proceeds and
that it was entitled, under the consolidated return
regulations, to increase its basis in MLL’s and MLCR’s
stock as a result of the cross-chain sales.
Held: The cross-chain sales qualified as
redemptions in complete termination of MLL’s and MLCR’s
interest in the subsidiaries sold cross-chain under
sec. 302(b)(3), I.R.C., and must be taxed as
distributions in exchange for stock under sec. 302(a),
I.R.C., rather than as dividends under sec. 301, I.R.C.
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