Reference no: EM131775997

Your client, Purple Corporation, has done well since its formation 20 years ago. This year, it recognized a $50 million capital gain from the sale of a subsidiary. Purple's CEO has contacted you to discuss a proposed transaction to reduce the tax on the capital gain. Under the proposal, Purple will purchase all of the common stock in Yellow Corporation for $200 million. Yellow is a profitable corporation that has $63 million in cash and marketable securities, $137 million in operating assets, and approximately $280 million in E & P. After its acquisition, Yellow will distribute $50 million in cash and marketable securities to Purple. Due to the 100% dividends received deduction, no taxable income results to Purple from the dividend. Purple will then resell Yellow for $150 million. The subsequent sale of Yellow generates a $50 million capital loss ($200 million (stock basis) - $150 million (sale price)). The loss from the stock sale can then be used to offset the preexisting $50 million capital gain. Will the proposed plan work?