Question
Please, write a new answer. The one already provided is not correct and does not need to be repeated. Your client, Purple Corporation, has done
Please, write a new answer. The one already provided is not correct and does not need to be repeated.
Your client, Purple Corporation, has done well since its formation 20 years ago. This year, it recognized a $50 million capital gain from the sale of a subsidiary. Purples CEO has contacted you to discuss a proposed transaction to reduce the tax on the capital gain. Under the proposal, Purple will purchase all of the common stock in Yellow Corporation for $200 million. Yellow is a profitable corporation that has $63 million in cash and marketable securities, $137 million in operating assets, and approximately $280 million in E & P. After its acquisition, Yellow will distribute $50 million in cash and marketable securities to Purple. Due to the 100% dividends received deduction, no taxable income results to Purple from the dividend. Purple will then resell Yellow for $150 million. The subsequent sale of Yellow generates a $50 million capital loss ($200 million (stock basis) - $150 million (sale price)). The loss from the stock sale can then be used to offset the preexisting $50 million capital gain. Will the proposed plan work?
Partial list of research aids:
IRC - 1059
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