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Unformatted text preview: H Chapter Five H COMPLETE LIQUIDATIONS SOLUTIONS TO RESEARCH PROBLEMS RESEARCH PROBLEMS 5-32 In Kimbell-Diamond Milling Co. , the government successfully argued that the purchase of corporate stock followed immediately by a liquidation should be treated as a purchase of the acquired corporation’s assets. The basis of the assets equals the purchase price of the stock. The reclassification of a stock purchase into an asset purchase is referred to as the Kimbell-Diamond doctrine. 5- In Snively , the Tax Court and Court of Appeals expanded the Kimbell-Diamond doctrine to cover the purchase of stock by individuals. In Kimbell-Diamond , a corporation acquired the stock of another corporation. 5- Congress codified the Kimbell-Diamond doctrine in old § 332 and § 334(b)(2). At that time, it was uncertain if the Kimbell-Diamond doctrine survived the Code change. In Chrome Plate, Inc. , the Court of Appeals stated that the only way to treat a stock purchase as an asset purchase was to meet the formal conditions of § 332 and § 334(b)(2). Congress endorsed this decision when it replaced §§ 332 and 334(b)(2) with § 338. 5- Section 338 applies only to the purchase of stock by a corporation. Because S is an individual, it can be argued that the Kimbell-Diamond doctrine, as expanded by Snively , is still viable. Applying these rules, S would have a basis of $600,000 for the asset (cost of the stock) and no gain or loss would be recognized on liquidation. If S were a corporation, its basis would be limited to $200,000 under §§ 332 and 334, since the corporation did not make the required election under § 338 to receive a step-up in basis. 5-33 In order for Data Corporation (Data) to make a valid § 338 election, a qualified stock purchase of Sales Corporation (Sales) must occur. Section 338(d)(3) defines a qualified stock purchase as 5- any transaction or series of transactions in which stock of one corporation possessing (A) at least 80 percent of the total combined voting power of all classes of stock entitled to vote, and (B) at least 80 percent of the total value of all the stock … is acquired by another corporation by purchase during the 12-month acquisition period. 5- The 12-month acquisition period, according to § 338(h)(1), is any 12-month period during which the 80 percent control test is satisfied. Data achieved 80 percent control of Sales. However, the control was not achieved solely by purchase, but rather by purchase and redemption. Additionally, the period extended longer than 12 months. There are three questions ( issues ) to be answered. First, can redemptions be used to satisfy the requirements of a qualified stock purchase? Second, are any extensions of the 12-month acquisition period permitted (i.e., pursuant to a plan)? Third, does Data’s intent to purchase Sales’ assets have any impact?...
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This note was uploaded on 07/26/2011 for the course TAX 772 taught by Professor Ber during the Spring '11 term at Hartford.
- Spring '11