Acc 565 Parent Tyrone Subsidiary Tax Research

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Determine the Facts1
Locate the Applicable Authorities1
Evaluate Authorities1
Analyze the Facts in Terms of Applicable Authorities2
Communicate Conclusions and Recommendations to Others3
Client Letter12

Determine the Facts
Parent Corporation has owned 60% of Subsidiary Corporation’s single class of stock for a number of years. Tyrone owns the remaining 40% of the Subsidiary stock. On August 10, of the current year, Parent purchases Tyrone’s Subsidiary stock for cash. On September 15, Subsidiary adopts a plan of liquidation. Subsidiary then makes a single liquidating distribution on October 1. The activities of Subsidiary continue as a separate division of Parent. Locate the Applicable Authorities

IRC: 332 (b), 1504 (a) (see attached)
Rev Rul 70-106, 1970-1 CB 70
Rev Rul 75-521, 1975-2 CB 120

Evaluate Authorities

The issue in our Parent-Subsidiary-Tyrone situation is whether the requirements of Section 332 and Section 1504 are satisfied. Two recent revenue rulings offer additional guidance on the level of stock. Because we do not have to look further than the IRC and Rev Rul, we can have confidence in our tax assessment.

Analyze the Facts in Terms of Applicable Authorities
Section 332 requires Parent to meet stock requirements on the date of the liquidation plan and further requires Parent to own the required level of stock until receipt of the liquidation. Additionally, the stock requirements set forth in 1504 dictate that the level of stock must also be 80% of the combined voting power, as well as 80% of the total value of stock. Because Subsidiary only has 1 class of stock, this requirement is easily satisfied.

Our concern is because 60% of the stock was held prior to the August 10th purchase of Tyrone, Subsidiary’s minority stockholder. However, there is no indication Parent or Tyrone were aware of any plan of liquidation prior to September 15th.

Rev Rul 70-106, 1970-1 C.B. 70 illustrates the treatment of when a redemption and liquidation is not a Sec 332 transaction. The ruling holds that the liquidation of the corporation fails to meet the 80% stock ownership requirement of Sec 332 (b) (1). The IRS held that Sec 332 did not apply because a plan of liquidation was adopted at the time an agreement was made with the minority shareholders to redeem their stock.

Conversely, Rev Rul 75-521, 1975-2 C.B. 120 applies, when 50% of the subsidiary stock was held by a single shareholder and 50% was held by a single corporate shareholder. The corporate shareholder purchased the shares held by the individuals, then as the only shareholder, adopted a plan of liquidation under Sec 332.

In our case, the liquidation of Subsidiary qualifies for nonregognition of gain (loss) under Sec 332 and 337; and Parent must assume Subsidiary’s E&P. Additionally, the asset base of Subsidiary carries over to Parent (Sec 334).

Communicate Conclusions and Recommendations to Others
See attached Memorandum-to-the-File and Client Letter

Location in Internal Revenue Code
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES -------------------------------------------------
Subchapter C - Corporate Distributions and Adjustments -------------------------------------------------
Subpart A - Effects on Recipients
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