Significant recent developments.

EXECUTIVE SUMMARY

* Final regulations provide that E and F reorganizations are not subject to the COI and COBE requirements.

* Other final regulations address COI satisfaction when the issuing stock declines in value after the sing date, the interpretation of plans under Sec. 355(e) and loss disallowance on a sale of subsidiary stock.

* The Service issued additional guidance on the interpretation of plans under Sec. 355(e) and elections under new Sec. 362(e)(2)(C).

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This article summarizes significant recent developments affecting C corporations and consolidated returns. It covers many new final, temporary and proposed regulations and noteworthy cases and ruling issued over the past year.

The following is a summary of income tax developments during the past year affecting corporations, including those that file consolidated returns. No significant legislation affecting corporations has been enacted since the American Jobs Creation Act of 2004 (AJCA) was signed in October 2004. (1) What follows, is a summary of regulatory and administrative guidance that has been issued in the past year.

Final Regs.

As a general matter, an acquisition by one corporation of another's stock must meet the requirements for "reorganization" status under Sec. 368 to qualify for non-recognition treatment at both the corporate and shareholder levels; otherwise, the acquisition will be treated as a taxable sale.

In achieving reorganization status, a transaction must fit one of the reorganization types (e.g., a statutory merger described in Sec. 368(a)(1)(A) (an A reorganization)) and meet other requirements in regulations, including continuity of interest (COI), measured at the shareholder level, and continuity of business enterprise (COBE), measured at the corporate level. Regs. Sec. 1.368-2(b) generally accords nonrecognition treatment to exchanges that represent only a readjustment of COI in property under modified corporate forms, and distinguishes them from sale transactions.

COI and COBE in E and F Reorgs.

Final regulations (2) provide that the COI and COBE requirements need not be met for Sec. 368(a)(1)(E) and (F) reorganizations. These rules were issued after proposed regulations (3) that contained the COI and COBE exclusionary provisions and four requirements needed to qualify a transaction as an F reorganization. Treasury decided to accelerate adoption of the rule providing that the COI and COBE requirements do not apply to F reorganizations, which was in response to comments on the proposed regulations. The remaining portions of the proposed regulations have not been finalized.

The final rules provide taxpayers with greater flexibility in structuring a transaction to qualify as a "mere change in identity, form, or place of organization" (a reorganization under Sec. 368(a)(1)(F)). For example, before these regulations, a prospective purchaser that wanted to organize a target corporation under the laws of a different state, could have reincorporated the target, pursuant to a single plan, by merging it into a newly formed corporation (new target) organized under the laws of the new state, and then sold the new target for cash. However, the purchaser would have run the risk of having the reincorporation disqualified as an F reorganization. Regs. Sec. 1.368-1(b), as amended, should now provide comfort that the reincorporation transfer, which involved a transfer of assets from one corporation to a new one, will not be disqualified as an F reorganization, even though the proprietary interests in the new target will be held entirely by new shareholders. (4) In addition, the COBE requirement no longer applies to bar the new target from disposing of a significant portion of its assets following the transaction. (5)

COI Testing Date

The Service issued final regulations (6) addressing whether COI is satisfied when the value of the issuing corporation's stock declines between the date the parties agree to the transaction's terms (the signing date) and the date the transaction closes. If the reorganization contract provides for fixed consideration, the consideration to be exchanged for a proprietary interest in the target will be valued on the last business day before such contract is binding. The final rules amend and finalize regulations initially proposed in August 2004 (7) and apply to transactions occurring under binding contracts entered into after Sept. 16, 2005.

Under the proposed regulations, consideration was treated as fixed if the contract states the number of shares of the issuing corporation and the amount of money (if any) to be exchanged for proprietary interests in the target. The final regulations expand the definition of "fixed consideration" to include a contract that provides for either the percentage (1) of the number of shares of each class of target stock or (2) by value of the target shares to be exchanged for issuing corporation stock, as long as such target shares, as well as the target shares to be exchanged for consideration other than issuing corporation stock, each represent an economically reasonable exchange.

Contingent consideration: Generally, a contract provision providing for contingent consideration prevents the con tract from being treated as providing for fixed consideration. However, the final regulations contain a limited exception in cases in which the (1) contingent consideration consists solely of the issuing corporation's stock and (2) execution of the potential reorganization would have resulted in the preservation of a substantial part of the value of the target shareholders' proprietary interests in the target if none of the contingent consideration were delivered to them (i.e., the proprietary interest in the issuing corporation could only increase, if the contingency is met).

Nature of nonstock consideration: Under the proposed regulations, the signing-date rule applied only when the nonstock element of consideration was money. The final regulations allow the signing-date rule to apply to transactions in which the nonstock consideration includes property other than money (e.g., securities, notes, etc.), which represents a significant expansion of the proposed regulations.

Valuation--the "as of the end of the last business day" rule: The final regulations clarify certain valuation issues. First, to permit an appropriate valuation of consideration tendered in exchange for target stock, they provide generally that consideration to be exchanged for target shares has to be valued the day before the contract is binding. In addition, there are rules for determining value when the issuing corporation issues a new class of stock not previously outstanding as consideration.

Escrowed stock: The final regulations also clarify that placing part of consideration to be exchanged for target stock in escrow, to secure the target's performance of customary pre-closing covenants or target representations and warranties, will not prevent a contract from being treated as providing fixed consideration. In addition, the final regulations' examples reflect that forfeited stock is not treated as preserving the target shareholders' proprietary interests in the target, and forfeited nonstock consideration does not count against the preservation Of the target shareholders' proprietary interests in the target.

Contract modifications and anti-dilution provisions: A contract modification generally has the effect of "resetting the dock:' However, under the final regulations, a modification that has the sole effect of providing for the issuance of additional shares of issuing corporation stock to the target shareholders will not be treated as a modification, if the execution of the potential reorganization would have resulted in the preservation of a substantial part of the value of the target shareholders' proprietary interests in the target had there been no modification. In addition, consideration will not be treated as fixed in cases in which the contract does not contain an anti-dilution clause relating to the stock of the issuing corporation, and the issuing corporation alters its capital structure between the first date there is an otherwise binding contract and the effective date of the potential reorganization, in a manner that materially alters the economic arrangement of the contracting parties.

Given the changes described above, the final regulations expand the scope of the signing-date rule as originally proposed. In addition, the IRS and Treasury expressly acknowledge in the preamble that the COI requirement is satisfied when 40% of the target's stock is exchanged for the issuing corporation's stock. (8) The preamble further notes that this principle applies whether or not the signing-date rule applies.

Sec. 355(e)

Generally, Sec. 355(e) requires a distributing corporation to recognize gain (if any) on a distribution of a controlled corporation's stock that would otherwise meet Sec. 355 tax-free requirements if the distribution were "part of a plan (or series of related transactions)" under which one or more persons acquire at least 50% of either the distributing or controlled corporation's stock (a Sec. 355(e) plan). It contains a rebuttable presumption that any acquisition beginning two years before the distribution and ending two years after is part of a Sec. 355(e) plan. (9)

The Service issued final regulations (10) under Sec. 355(e) on the interpretation of "plan (or series of related transactions)" for affected spinoffs, splitoffs and split-ups. The final regulations adopt, with modifications, Prop. Regs. Sec. 1.355-7 (11) and apply to distributions occurring after April 19, 2005. They also remove Temp. Regs. Sec. 1.355-7T, which was scheduled to expire on April 26, 2005. (12)

As modified, the final regulations further clarify the Sec. 355(e) "plan requirement," which is a critical element, and are generally taxpayer-favorable. They retain the facts-and circumstances approach used in Temp. Regs. Sec. 1.355-7T, in determining whether there is a Sec. 355(e) plan, as well as the objective safe harbors. The final regulations (1) revise some of the safe harbors and add new ones, particularly affecting pre-distribution acquisitions; (2) clarify what constitutes "substantial negotiations and discussions" between distributing, controlled and potential acquiring corporations; and (3) treat compensatory options as options that may, in certain circumstances, be treated as an agreement, understanding or arrangement to acquire stock.

Safe harbors: For example, in an effort to provide additional bright-line rules for determining whether a distribution and a pre-distribution acquisition not involving a public offering are not part of a plan, the final regulations modify Safe Harbor IV, and add new

Safe Harbor V. Under Safe Harbor IV, as amended, a distribution and a pre-distribution acquisition (other than a public offering) will not be considered part of a plan if the acquisition occurs before the date of the first disclosure event regarding the distribution.

Under Safe Harbor V, a distribution that is pro rata among the distributing shareholders and a pre-distribution acquisition of the distributing corporation (other than a public offering), will not be part of a plan if the acquisition occurs after the date of a public announcement as to the distribution and there were no discussions by the distributing or controlled corporation with the acquirer as to a distribution on or before the date of the first public distribution announcement. Safe Harbor V only applies to acquisitions by persons that do not have the ability to effect the distribution. It is unavailable for acquisitions by persons that were controlling shareholders or 10% shareholders of the distributing corporation at any time during the period beginning immediately after the acquisition and ending on the distribution date.

Consolidated Return Loss Disallowance

Final regulations (13) under Secs. 337(d) and 1502 disallow certain losses recognized on sales of subsidiary stock by members of a consolidated group. However, in all likelihood, these regulations are not the final word on the subject, which has been the focus of multiple regulation projects, litigation and administrative guidance over the past 20 years. (14)

Temp. Regs. Sec. 1.337(d)-2T (as in effect on March 2, 2005) was adopted as final Regs. Sec. 1.337(d)-2 without substantive change. Significantly, according to the preamble, the IRS will accept the "basis disconformity" method as a method for determining whether a subsidiary stock loss is disallowed and subsidiary stock basis is reduced under the final regulations. Also, to permit taxpayers to elect to apply Kegs. Sec. 1.1502-20 without regard to the duplicated-loss factor of the loss disallowance rule, or Regs. Sec. 1.337(d)-2, the final regulations also adopt Temp. Regs. Sec. 1.1502-20T and correlative Temp. Regs. Sec. 1.1502-32T (as in effect on March 2, 2005) as final, without substantive change.

The Service does not believe the tracing approach is administrable, but nevertheless finalized the temporary regulations, as they were set to expire on March 7, 2005. In the preamble, it stated that it continues to study these issues and intends to publish proposed regulations with an alternative approach "within the near term." It is also considering finalizing Temp. Regs. Sec. 1.1502-35T (which is scheduled to sunset on March 14, 2006). Because issues in the two regulations overlap, it is possible that an alternative loss disallowance rule will be considered in connection with the finalization of Temp. Regs. Sec. 1.1502-35T.

Attribute Reduction for COD Income

The Service issued final regulations (15) for reducing tax attributes when a member of a consolidated group realizes cancellation of indebtedness (COD) income. These rules generally adopt Temp. Regs. Secs. 1.1502-28T, -19T, -21T and -32T, and Prop. Regs. Sec. 1.1502-11, with certain modifications.

Final Regs. Sec. 1.1502-21 does not significantly depart from the temporary regulations' overall approach to consolidated attribute reduction. It follows the thrust of earlier proposed and temporary regulations, generally adopting a consolidated approach to attribute reduction that reduces all consolidated tax attributes (including those attributable to members other than the debtor member) available to the debtor, beginning with the debtor member's own attributes. The final regulations: (1) clarify the timing of the apportionment of losses under Regs. Sec. 1.1502-21; (2) provide additional guidance on the application of the "look-through" rule that applies if the debtor member's reduced attribute is the basis of another member's stock; (3) clarify the timing of asset basis reduction under Sec. 1017(a); (4) coordinate attributes available to the group when the debtor member leaves during the year in which the COD event occurs; (5) prescribe a method for attribute reduction when intragroup Sec. 381(a) transactions involve the debtor member and a successor member (the latter's attributes are available for reduction); (6) provide that the "next day" rule of Regs. Sec. 1.1502-76 cannot apply to treat realized COD income as realized the next day; and (7) clarify the timing of investment adjustments in the year of a COD event.

In addition, the final regulations address circular basis adjustments under Regs. Sec. 1.1502-11, when there is a disposition of member stock during the same tax year in which any member realizes excluded COD income. Regs. Sec. 1.1502-28 is generally effective for debt discharges occurring after March 21, 2005. However, the final regulations permit retroactive application of some of the earlier rules.

Case Law

Sec. 246A Erroneously Reduced DRD 

Prior to the 1984 enactment of Sec. 246A, corporations that borrowed money to finance stock purchases could combine the interest-expense and dividends-received deductions (DRDs) to receive a double deduction, allowing them to virtually eliminate their tax liability on debt-financed dividend income. Congress found this abusive; (16) thus, Sec. 246A reduces the DRD allowable under Sec. 243(a) for dividends paid on "debt-financed portfolio stock"

One of the more interesting recent cases involved the publicly traded investing conglomerate headed by Warren Buffett, and illustrated the practical difficulties of tracing the use of funds. (17) In the late 1980s, Berkshire Hathaway (Berkshire), now known as OBH, raised approximately $750 million through the issuance of debentures, bonds and investment contracts, whose proceeds were contributed to the capital of NICO, a subsidiary within the Berkshire affiliated group, and commingled with NICO's bank account. Millions of dollars flowed through NICO's account in a single day, including receipts from operations. Due to the fungibility of this account, it was generally impossible to determine whether the proceeds, or a portion thereof, were used for general operating expenses or for investment. However, because Berkshire's practice at all relevant times was to keep the funds in NICO's account as close to fully invested as possible, the district court stated it is likely that a significant portion of the proceeds were ultimately invested by Mr. Buffett.

On audit, the IRS determined that Berkshire's DRD for its 1989-1991 tax years should have been reduced under Sec. 246A, because some of the proceeds from the debt issuances were "directly attributable" to its purchases of dividend-paying stocks. For most stock, the Service's examining agent attempted to "trace" the debt issuance proceeds by allocating them to investments made on the same day they were deposited into NICO'S account. However, the court held that there was "no reasonable basis on which it could conclude that Berkshire's dominant purpose in incurring the indebtedness at issue was to acquire dividend-paying stocks."

It also determined that the examining agent's traces did not satisfy the directly traceable prong set forth in the legislative history to Sec. 246A, finding the "theoretical traces" inconsistent with the plain meaning of the term "directly traceable." The court noted that the current statutory and regulatory regime of Sec. 246A makes it virtually impossible for the IRS to trace debt proceeds and, thus, assess tax deficiencies against companies that engage in numerous investment transactions. However, it stated that any decision to loosen the "direct" connection required between debt proceeds and the purchase of dividend-paying stocks must be made by Congress or the Service, not the courts.

Sec. 382 Ownership Change for Sibling Transfer

Sec. 382(a) limits the amount of "pre-change losses" that a corporation (loss corporation) may use to offset taxable income in the tax years or periods following an ownership change. Under Sec. 382(d)(1), "pre-change losses" include net operating loss (NOL) carryovers to the tax year in which the ownership change occurs and any NOL incurred during that year that is allocable to the portion of the year ending on an ownership change date.

An ownership change is deemed to have occurred if, on a required measurement date (a testing date), the aggregate percentage ownership interest of one or more 5% shareholders of the loss corporation is more than 50 percentage points greater than the lowest percentage ownership interest of such shareholder(s) during the (generally) three-year period immediately preceding the testing date (the testing period). (18) Under Sec. 382 (1)(3)(A), with certain exceptions, Sec. 318's constructive ownership rules apply in determining stock ownership. Under the first of those exceptions, the family attribution rules of Sec. 318(a)(1) and (5)(B) do not apply; instead, an individual and all members of his or her family described in Sec. 318(a)(1) (i.e., spouse, children, grandchildren and parents) are treated as one individual.

In Garber Industries, (19) at issue was whether a 1998 stock sale between brothers that increased one sibling's percentage ownership of the taxpayer by more than 50 percentage points resulted in an ownership change for Sec. 382 purposes, triggering the Sec. 382 limit on NOL carryovers.The taxpayer asserted that, although siblings are not family members described in Sec. 318 (a) (1), the brothers are nonetheless members of the same family when such determination is made by reference to their parents and grandparents.

The Tax Court concluded that the family aggregation rule of Sec. 382(1) (3)(A)(i) applied solely from the perspective of individuals who were shareholders (as determined under the attribution rules of Sec. 382(1) (3)(A)) of the loss corporation. An individual shareholder's family consisted solely of his or her spouse, children, grandchildren and parents for these purposes; thus, sibling shareholders were not aggregated under Sec. 382 (1)(3)(A)(i) if none of their parents and grandparents were shareholders of the loss corporation. Because the siblings at issue were not children or grandchildren of an individual who was a shareholder of the taxpayer at any relevant time, they were not aggregated for purposes of applying Sec. 382. Thus, it followed that one sibling's purchase of shares from the other sibling in 1998 resulted in an ownership change with respect to the taxpayer, as contemplated in Sec. 382(g).

Proposed Regulations

Expansion of "Merger"

Proposed regulations (20) would expand the definition of "statutory merger or consolidation" as used in Sec. 368(a)(1)(A) (A reorganization). Temporary regulations 21 issued in 2003 provide that a statutory merger or consolidation is a transaction effected pursuant to the laws of the U.S., a state or the District of Columbia, in which, as a result of the operation of such laws, certain enumerated events occur simultaneously at the effective time of the transaction, essentially adopting a more functional definition of a merger for Federal income tax purposes. The newly proposed regulations expand on that definition, and would extend A reorganization status to mergers under foreign law.

In particular, they provide that "a statutory merger or consolidation is a transaction effected pursuant to the statute or statutes necessary to effect the merger or consolidation." This change will allow a transaction effected pursuant to the statutes (including legislation supplemented by administrative or case law) of a foreign jurisdiction or of a U.S. possession to qualify as a Sec. 368(a)(1)(A) merger or consolidation, provided that it otherwise qualifies as a reorganization (i.e., the transaction satisfies the COI, COBE and business purpose requirements). Thus, if the regulations are adopted as proposed, greater flexibility would be accorded to taxpayers contemplating a merger under foreign law; it would be possible to achieve A reorganization status for such transactions, a result currently not available. (22)

Insolvent Corporations

Proposed regulations (23) provide guidance on corporate formations and reorganizations and liquidations of insolvent corporations. The proposed rules would adopt a net-value requirement for each of the described non-recognition rules (Secs. 332, 351,354, 361 and 368) in subchapter C. To qualify for non-recognition treatment, there must be an exchange of property for stock, or in the case of Sec. 332, a distribution of property in cancellation or redemption of each class of outstanding stock. (24) The IRS explained that the net-value requirement is appropriate, because transactions that fail it (i.e., transfers of property in exchange solely for the assumption of or in satisfaction of liabilities) resemble sales and should not receive non-recognition treatment. There are also rules addressing the treatment of creditors' claims as proprietary interests for purposes of the COI requirement, generally providing that a creditor's claim against a target may constitute a proprietary interest therein if the target is in a Title 11 (bankruptcy) or similar case, or the target's liabilities exceed the fair market value (FMV) of its assets immediately before the potential reorganization.

Complete Liquidations into Multiple Distributees

Proposed regulations (25) issued under Sec. 1502 provide guidance on how a liquidating member's intercompany items (and items described in Sec. 381(c)) are succeeded to, and taken into account, when more than one distributee member acquires the liquidating corporation's assets in a complete Sec. 332 liquidation. These roles will apply to transactions that occur after the final regulations' publication date. They reflect the concern that tax attributes and other assets of an acquired corporation could be broken up without a corporate-level tax. They also address the manner in which distributee members succeed to the intercompany items of the liquidating member that were not generated in the liquidating transaction.

IRS Pronouncements

Sec. 355(e) Spinoff 

In Rev. Rul. 2005-65, (26) the Service analyzed whether a pre-distribution acquisition of 55% of a distributing corporation's (Distributing's) outstanding stock was part of a plan that included the distribution of the controlled corporation (Controlled) within the meaning of Sec. 355(e). In the ruling, Distributing, a publicly traded corporation, is in the pharmaceuticals business. Controlled, Distributing's wholly owned subsidiary, conducts a cosmetics business. For reasons consistent with the "fit and focus" business purpose, (27) Distributing publicly announced its intention to distribute all of Controlled's stock pro rata to Distributing's shareholders. Following the announcement--but before the distribution-Distributing began discussing an acquisition with a widely held corporation (X) also engaged in the pharmaceuticals business. No discussions had occurred before the announcement between Distributing, Controlled and X regarding an acquisition or distribution. Distributing would have been able to continue to operate its pharmaceuticals business successfully without combining with another company. Although X indicated during negotiations that it was in favor of the distribution, nothing in the merger agreement required it.

As a result of X's merger into Distributing, X's former shareholders held 55% of Distributing's stock; its chairman and chief executive officer (CEO) each became Distributing's board chairman and CEO, respectively. Six months after the merger, Distributing distributed Controlled's stock pro rata in a distribution to which Sec. 355 applied, but Sec. 355(d) did not. The distribution was substantially motivated by the business purpose of eliminating the competition for capital between the pharmaceuticals and cosmetics businesses.

The issue was whether the X shareholders' acquisition of Distributing's stock and Distributing's distribution of Controlled's stock were part of a plan within the meaning of Sec. 355(e). If they were, then Distributing would be required to recognize gain on the prorata distribution of the Controlled stock to the Distributing shareholders. Considering all the facts and circumstances and, in particular, the facts that the distribution (1) was motivated by a business purpose other than to facilitate an acquisition and (2) would have occurred regardless of the acquisition, the Service concluded that the acquisition and distribution were not part of a plan under Sec. 355(e) or Regs. Sec. 1.355-7(b).

Sec. 362(e)(2)(C) Elections

Sec. 362(e) was enacted as part of the AJCA. (28) It generally provides that, if property is transferred to a corporation as a capital contribution or in an exchange to which Sec. 351 applies and the aggregate basis of the transferred property exceeds its aggregate value immediately thereafter, the transferee corporation's basis in the property cannot exceed the property's FMV. Under Sec. 362(e)(2)(C), however, the transferor and transferee can make a joint, irrevocable election to reduce the transferor's basis in the stock received to its FMV; no reduction of the transferee's basis in the property received be required.

Sec. 362 (e) (2) (C) provides further that the election to reduce stock basis must be filed with the return for the tax year in which the transaction occurred, in such form and manner as required by the IRS. Notice 2005-70 (29) established the form and manner for making such an election. It also indicated that the Service will treat other statements on or with returns as effective elections under Sec. 362(e)(2)(C) if they disclose sufficient information to apprise it that an election has been made for a particular transaction and by particular parties. Taxpayers that are uncertain as to whether Sec. 362(e)(2) applies to their transaction can make a protective election, which will have no effect if Sec. 362(e)(2) does not apply to the transaction, but which Hill otherwise be binding and irrevocable. Further, the notice is effective for all elections under Sec. 362(e)(2)(C) until Treasury and the Service provide further guidance.

For more information about this article, contact Mr. Bakke at [e-mail].

Don W. Bakke, J.D., LL.M.

Senior Manager

Ernst & Young LLP 

National Tax M&A/Transaction Advisory Services 

Washington, DC

Elizabeth Zaitzeff, J.D., LL.M.

Senior Associate

Ernst & Young LLP

National Tax M&A/Transaction Advisory Services

Washington, DC

(1) For a summary of major corporate provisions of that legislation, see Karlinsky and Orbach, "The AJCA's Domestic Business Provisions," 36 The Tax Adviser 148 (March 2005).

(2) TD 9182 (2/25/05), amending Regs. Sec. 1.368-1(b).

(3) REG-106889-04 (8/12/04).

(4) See Prop. Regs. Sec. 1.368-2(m)(5), Example 6.

(5) Notwithstanding the elimination of the COI and COBE requirements, F reorganizations are still subject to identity-of-interest and identity-of-asset requirements; see Rev. Ruls. 66-284, 1966-2 CB 115 and 96-29, 1996-1 CB 50.

(6) TD 9225 (9/16/05).

(7) REG-129706-04 (8/09/04).

(8) See John A. Nelson Co., 296 US 374 (1935).

(9) See Sec. 355(e)(2)(B).

(10) TD 9198 (4/19/05).

(11) REG-163892-01 (4/26/02).

(12) For a discussion of Temp. Regs. Sec. 1.355-7T, see Schneider and Chui, "Corporations & Shareholders: Significant Recent Developments," 34 The Tax Adviser 42 (January 2003).

(13) TD 9187 (3/22/05).

(14) For detailed background on this subject, see Dubroff, Broadbent, Blanchard and Duvall, Federal Income Taxation of Corporations Filing Consolidated Returns, [section] 72.01 et seq. (Matthew Bender, 2d ed., 2005).

(15) TD 9192 (3/22/05).

(16) See H Rep't No. 98-432, 98th Cong., 2d Sess. (1984), pt. 2, p. 1180-81.

(17) See OBH, Inc., Dkt. Nos. 8:02CV374 and 8:04CV460, DC NE, 10/28/05.

(18) See Secs. 382(g)(1), (2) and (i); and Kegs. Sec. 1.382-20)(4).

(19) Garber lndus. Holding Co., 124 TC 1 (2005).

(20) REG-117969-00 (1/5/05).

(21) See Temp. Regs. Sec. 1.368-2T(b)(1)(ii).

(22) However, a merger between corporations under foreign law may qualify as a reorganization under Sec. 368(a)(1)(C), although a C reorganization is more stringent than an A reorganization; see Sec. 367 (reorganization exchange involving foreign corporation may be taxable at both corporate and shareholder levels in certain instances).

(23) REG-163314-03 (3/9/05).

(24) See Spaulding Bakeries, Inc., 252 F2d 693 (2d Cir. 1958); see also Rev. Rul. 2003-125, IRB 2003-52, 1243 (parent may be able to claim worthless stock deduction on deemed dissolution of insolvent subsidiary).

(25) REG-131128-04 (2/18/05).

(26) Rev. Rul. 2005-65, IRB 2005-41,684.

(27) See Rev. Proc. 96-30, 1996-1 CB 696, Section 2.05.

(28) For a discussion, see Karlinsky and Orbach, note 1 supra.

(29) Notice 2005-70, IRB 2005-41,694.