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step_transaction_collapsed - partnership liquidated...

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Step Transactions Collapsed Ms. Carlos and Mr. Dillon each owned 50 percent of the stock of two corporations, A and B. In recent years, Ms. Carlos and Mr. Dillon had argued frequently over shareholder issues and no longer wished to continue their association. Both agreed that Ms. Carlos should own 100 percent of the stock of A and Mr. Dillon should own 100 percent of the stock of B. Since the stock had appreciated in value, a direct exchange of shares between the owners would produce taxable gains. To avoid this result, they contributed their stock in both corporations to a partnership in exchange for partnership interests. Two weeks later, the
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Unformatted text preview: partnership liquidated, distributing the stock of A to Ms. Carlos and the stock of B to Mr. Dillon in liquidation of their partnership interests. In general, Sec. 731 provides that a distribution of capital gain property in liquidation of a partner’s interest produces no current gain or loss. Each partner would receive a carryover basis in the A & B stock. However, the IRS applied the step transaction doctrine to ignore the contribution and distribution of property to and from the partnership. The transaction was treated as a taxable exchange of stock between Ms. Carlos and Mr. Dillon forcing each to recognize a capital gain....
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