Chapter 4

The Purchase of a Corporation’s Subsidiary

Larger corporations often have subsidiaries. Conditions change and a subsidiary is put up for sale. Often some of the employees are the ­market for the stock. A corporation’s sale of its subsidiary brings into play some unique provisions in the tax laws that are intended to prevent triple ­taxation of the income from the subsidiary. The same income earned by a corporation is often subject to tax by three different taxpayers, or groups of taxpayers. For example, assume that X corporation transferred $1,000 cash to its newly formed subsidiary, Y corporation, for all of its ­outstanding stock. Further, assume Y used the cash to purchase a single asset that increased in value to $1,500 when X ...

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