Daisy Corporation Is the Sole Shareholder of Ostrich Corporation, Which

question 106

Essay

Daisy Corporation is the sole shareholder of Ostrich Corporation, which it hopes to sell within the next three years.
The Ostrich stock (basis of $25 million) is currently worth $30 million, but Daisy believes that it would be easier to find a buyer if it was worth less. To lower the value of its stock, Ostrich distributes $4 million cash to Daisy (sufficient E & P exists to cover the distribution). At a later date, Daisy sells Ostrich for $26 million.
a. What are the tax consequences to Daisy on the sale?
b. What would be the tax consequences if Ostrich had not first distributed the $4 million in cash and Daisy sold the Ostrich stock for $30 million?

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Definitions:

Customer Service

The assistance and support provided by a company to those people who buy or use its products or services.

Value Creation

The process by which businesses or entrepreneurs develop new products, services, or processes that are valuable to customers.

Call Reluctance

The hesitation or resistance a salesperson may feel when it comes to making phone calls to potential clients, often stemming from fear of rejection.

Prospect Aversion

The tendency of potential customers to avoid engaging with sales efforts or communications, often due to perceived pressure or disinterest in the product.