Canary Corporation

There is no word limit”Canary Corporation wholly owns Parrot Corporation, formed six years ago with the transfer of several assets and a substantial amount of cash. Canary’s basis in the Parrot stock is $10.5 million. Since it was formed, Parrot has been a very successful manufacturing company and currently has accumulated E & P of $8 million. The company’s principal assets are property, plant and equipment (worth $10 million) and cash and marketable securities of $8.5 million, for a total fair market value of $18.5 million.Canary and Parrot are members of an affiliated group and have made the election under §243 (b) to entitle Canary to a 100% dividends received deduction. From a strategic perspective, Canary is no longer interested in manufacturing and is considering a sale of Parrot. In anticipation of a sale int eh next year or two, the management of Canary has contacted you for advice. If Parrot is sold outright, Canary Corporation will have a capital gain of $8 million ($18.5 million fair market value less a basis of $10.5 million). As an alternative, taxes on a future sale would be minimized if Parrot first pays Canary an $8 million dividend equal to its E & P. With the 100$ dividends received deduction, the payment would be tax-free to Canary. Subsequent to the dividend payment, Parrot can be sold for its remaining value of $10.5 million ($10 million in property, plant, and equipment plus $500,000 in cash), resulting in no gain or loss to Canary.a. Prepare a letter to the president of Canary Corporation describing the results of the proposed plan. The president is Thelma Raisbeck, 1914 Broom Street, Wauwatosa, WI 53786.b. Prepare a memo for your firm’s client files.Partial list of research aids:Waterman Steamship Corp. v. Comm., 70-2 USTC ¶9514, 26 AFTR 2d 70-5185, 430 F.2d 1185(CA-5, 1970)”

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