We know Google reserves the right to ban all sites on a host if the host seems to have an unusual percentage of spammy sites on it.
Well, Google banned a whole sub-domain yesterday specifically co.cc.
Google's Matt Cutts actually mentioned it on Google + but now there are lots of threads on the topic. Threads at Google Webmaster Help, DigitalPoint Forums, WebmasterWorld and even Google AdWords Help.
Googler, JohnMu, explained they can do this and have been doing this elsewhere with places like Malware issues. He said:
As he mentions there, "if we see a very large fraction of sites on a specific freehost be spammy or low-quality, we do reserve the right to take action on the freehost as a whole." Taking action like this is not really something new, and it is something that we may do elsewhere at Google as well (eg as mentioned on with regards to malware).
If you feel that your particular site is in line with our Webmaster Guidelines, I would recommend submitting a reconsideration request. Additionally, if you use a subdomain on a widely used domain name, and feel that your subdomain provider is not up to par with regards to preventing and handling abuse quickly - be it webspam, phishing, or malware - you may wish to look into ways of remedying that.
That being said the Google AdWords Help forum even has an AdWords representative suggesting you do not use co.cc as a domain. The representative explained that although the TLD is not yet banned from AdWords, it is a risky TLD and it is "definitely [in] a bad neighborhood."