Paris Corporation has E&P of $200,000. Paris owns all of Slider Corporation's stock, which is worth $80,000. The stock has been held for five years. Paris distributes all of the Slider stock and $20,000 cash to a 50% shareholder in exchange for all of the shareholder's 100 shares of Paris stock. The exchange qualifies as a Sec. 355 split-off transaction. The 50% shareholder's basis in the Paris
stock surrendered is $90,000. What is the amount of the gain that the 50% shareholder must recognize?
What will be an ideal response?
FMV of Slider stock received $ 80,000
Plus: cash received 20,000
Amount realized $100,000
Minus: basis of Paris stock ( 90,000)
Realized gain $ 10,000
Recognized gain $ 10,000
The recognized gain is taxed as a capital gain under the Sec. 302(b) rules. The shareholder receives $20,000 cash in exchange for part of his/her Paris stock, which is followed by an exchange of the remaining Paris stock for the Slider stock. The redemption reduces the shareholder's interest from 50% (100/200 = 50%) to 44% (80/180 = 44.44%) which should be "not essentially equivalent to a dividend" under Sec. 302(b)(1). See Rev. Rul. 93-62.
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What will be an ideal response?