The Tax Aspects of Acquiring a Business, Second Edition, 2nd Edition

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 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 sold the ...