- 26 -
75-223, 1975-2 C.B. 109. That ruling describes three situations
in which a parent corporation (P) disposes of a wholly owned
operating subsidiary (S). In situation 1, P liquidates S in a
tax-free section 332 liquidation and sells the S assets for cash.
P distributes the cash to P’s shareholders in redemption of a
portion of their P stock. Situation 2 is the same as situation 1
except that S sells its own assets for cash prior to the section
332 liquidation and subsequent redemption distribution by P. In
situation 3, P simply distributes the S stock pro rata to its
shareholders in redemption of a portion of their P stock. The
issue, as stated in the ruling, is “whether, and to what extent,
the fact that a corporation has conducted a portion of its
business activities through a subsidiary rather than directly
precludes the application of section 346(a)(2) of the Code.”
1975-1 C.B. at 110. Under former section 346, a distribution in
partial redemption of the stock of a corporation is considered to
be made in partial liquidation of the corporation if the
distribution is on account of “the [distributing] corporation’s
ceasing to conduct, or consists of the assets of, a trade or
business * * * [actively conducted throughout the prior 5-year
period and] not acquired by the corporation within such period in
a [taxable] transaction”. Former sec. 346(a) and (b)(1). See
also sec. 1.346-1(a)(2), Income Tax Regs., stating: “An example
of a distribution which will qualify as a partial liquidation
Page: Previous 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 NextLast modified: May 25, 2011