Unwanted assets in a stock sale.

• Author: Recknagel, Lara C.

In any sale of a subsidiary's stock by a parent corporation, there may be subsidiary assets that the parent would like to retain, as well as assets that a purchaser may not want to acquire. Such assets could include contracts vital to the parent's business, machinery nearing the end of its useful life or other assets not essential to the subsidiary's business. In planning for such assets, three principal alternatives would permit a parent to retain certain assets not wanted by a purchaser while minimizing tax liabilities. The first two relate to the distribution of assets with built-in gain before a sale of a subsidiary's stock in which the subsidiary joins in the filing of a consolidated return with the parent. The third planning technique involves a sale of loss assets by the subsidiary to its parent, when the subsidiary is entitled to claim a loss.

First Strategy

Generally, when a corporation distributes an appreciated asset to a shareholder, the corporation recognizes gain under Sec. 311(b). However, for corporations filing a consolidated return, application of the investment adjustment rules of Regs. Sec. 1.1502-32 may produce a different result.

Example: P, a parent, has a $40 basis in the stock of a subsidiary, T. The stock has a fair market value (FMV) of $100. A sale of T's stock would result in a gain of $60 to P. If T owns an asset with a zero basis and a $40 FMV that a purchaser, A, does not want to acquire, T could distribute the asset to P prior to a sale of T stock without incurring any additional tax liability. Specifically, T would distribute the asset to P and recognize a $40 gain (under Sec. 311 (b)), which would be deferred under Regs. Sec. 1.1502-13(c)(1). P would be treated as receiving a dividend equal to the asset's FMV ($40). This dividend would be included in P's income under Regs. Sec. 1.1502-13(f)(2)(ii), and P's basis in its T stock would be reduced to $60 ($100 - $40) on receipt of the distribution (Regs. Sec. 1.1502-32(b)(2)(iv)). The subsequent sale of T stock to A would trigger a deferred intercompany gain, with $40 of gain being recognized by T while T is a member of P's consolidated group and P's basis in its T stock would increase by the $40 gain recognized (Regs. Sec. 1.1502-13 (d)).

As a result of these transactions, P's basis in its T stock would still be $40 ($40 beginning basis, less $40 dividend, plus $40 gain), but T's stock would be worth only $60 ($100 beginning basis less $40 from the unwanted...