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August 30, 2012
Reorganization Business Purpose

Full Text Published by Tax Analysts®

By Jasper L. Cummings, Jr.

Jasper L. Cummings, Jr., is of counsel with Alston & Bird LLP, Raleigh, N.C.

In this article, Cummings explains how corporate taxpayers can avoid having to conjure up a business purpose for an acquisitive reorganization, other than the acquisition.

A. COBE Acquisition Is a Business Purpose

Jasper L. Cummings, Jr.1. Point of article. This article asserts that section 368 does, or at least should, apply to an otherwise qualifying single-step acquisitive reorganization (A, B, C, D, or G) that is motivated by a principal purpose to reduce the future federal income tax liabilities of the combined corporate parties. This article aims to urge Treasury to recognize this law. This article is motivated to relieve corporate taxpayers from the charade and the attendant expense of trying to conjure up some business purposes for an acquisitive reorganization, other than the acquisition.

The IRS should confirm that acquiring a business or assets to be used in a business that satisfies the continuity of business enterprise (COBE) requirement is, by itself, a qualifying business purpose, in cases of normal combinative reorganizations. This conclusion does not depend on ignoring the reorganization business purpose requirement or on treating a tax reduction purpose as the needed business purpose (although it should suffice). Rather, it depends on treating the COBE of the target in the hands of the acquirer as a universally sufficient business purpose. Put another way, all acquisitive reorganizations that do not raise recharacterization issues and that otherwise qualify under section 368 involve a business acquisition, which reflects a purpose to acquire a business or business property, which is a sufficient business purpose.

The government has not explicitly accepted this conclusion, but it has tended to collapse the business purpose and COBE requirements into one. For example: (1) chief counsel commonly accepts all sorts of vague reasons about improved efficiency or risk management to justify acquisitive reorganizations where tax reduction also is occurring; (2) the IRS allows downstream mergers of pure holding companies to be reorganizations; (3) Treasury considered and decided not to view downstream mergers as violations of General Utilities repeal; and (4) Congress has based the principal corporate acquisition antiabuse rules (sections 269, 306(b), 357(b), 367(a), 382, and 384) on the assumption that corporations will be acquired principally for tax avoidance, including by acquisitive reorganizations.

The issue should be most acute in the context of the pure holding company merging downstream into its subsidiary, whether wholly or partly owned, because the holding company has no business of its own. Nevertheless, the IRS has treated these mergers as satisfying the COBE requirement in the sole shareholder case through a revenue ruling and has extended the principle to small merging shareholders through letter rulings. Having done so, the IRS can hardly deny the acquisition is for a business purpose (and indeed did not question the purpose in those rulings).

This article will conclude by addressing LTR 201214013,1 involving two downstream reorganizations and a very favorable result for taxpayers.

2. What were they thinking? A good place to begin the examination of the business purpose issue is Rev. Proc. 86-42, 1986-2 C.B. 722, the former guidelines for letter rulings on acquisitive reorganizations. What was the IRS thinking when it failed to require a business purpose representation?

Perhaps it reasoned that the general instructions for letter rulings require (and required in 1986) "a complete statement of the business reasons for the transaction."2 Or perhaps there is another reason: The acquiring corporation necessarily and always has a sufficient business purpose to acquire from the target either a "significant line of business or a significant portion of T's historic business assets [that it will use] in a business," and these facts will always be present in type A, B, C, D, or G reorganizations (that do not involve divisions) to satisfy the COBE requirement.

The quoted language comes from the COBE regulation, reg. section 1.368-1(d). In practice the acquisition of a business or of business assets is the unquestioned business purpose for all acquisitive reorganizations, unless at least one of two facts intervenes: The corporate parties are related, or one of the parties has a tax attribute that when combined with the tax attributes of the other party would produce tax synergy.

When those facts intervene, uncertainty about business purpose tends to arise in the minds of tax advisers. For example, a simple intragroup merger can attract an inquiry from the corporation's outside auditors about the business purpose. As illustrated in LTR 201214013, the IRS expects the taxpayer to offer up one of the vague and perhaps irrefutable purposes that have served to justify many of these reorganizations for years: to obtain efficiencies, reduce redundancy, reduce risk, etc.

The tax world can continue in this direction, or the IRS can recognize publicly that when COBE and the other requirements of section 368 are satisfied, the acquisition of the business or assets to be used in a business is a sufficient business purpose for an acquisitive reorganization that does not involve a multi-step transaction. This suggestion was made by another commentator 60 years ago and remains valid.3 There is too much uncertainty in the corporate tax law today to delay clarifying this point.

Nothing precludes this interpretation of the law. Rather, this interpretation accurately states what the IRS actually does, albeit disguised under vague business purpose representations.

B. A Cumulative Requirement

1. Overview. Every tax professional knows that the Supreme Court inferred three requirements from the statutes for qualification of a reorganization under section 368: continuity of proprietary interest (COI), COBE, and business purpose.4 These normally are treated as three independent requirements of equal status. However, they reflect two strands of law: (1) the core policy justification for nonrecognition of gain or loss realized on any exchange (continuity of interest in property); and (2) the particular reason to allow nonrecognition for corporate reorganizations, which is the facilitation of normal business adjustments.

The signature tax benefit of corporate reorganizations is gain and loss nonrecognition. Reg. section 1.1002-1(c) explains that such nonrecognition is just one of several applications of a general principle based on ownership continuity:

    Exceptions to the general rule are made, for example, by sections 351(a), 354, 361(a), 371(a)(1), 371(b)(1), 721, 1031, 1035 and 1036. These sections describe certain specific exchanges of property in which at the time of the exchange particular differences exist between the property parted with and the property acquired, but such differences are more formal than substantial. As to these, the Code provides that such differences shall not be deemed controlling, and that gain or loss shall not be recognized at the time of the exchange. The underlying assumption of these exceptions is that the new property is substantially a continuation of the old investment still unliquidated; and, in the case of reorganizations, that the new enterprise, the new corporate structure, and the new property are substantially continuations of the old still unliquidated.

Of course, not all exchanges result in nonrecognition simply because the property owner receives virtually identical property interests, as the Supreme Court ruled in Cottage Savings Association v. Commissioner.5 Rather, Congress has selected a limited number of exchanges for that benefit, most of which are listed in the regulation quoted above. The COI and COBE requirements for reorganizations enforce the general underlying precondition for nonrecognition stated above.6

Addressing corporate reorganizations in 1935, the Supreme Court in Gregory v. Helvering7 interpreted the predecessor of section 368 to allow nonrecognition where there was a continuation of an interest in unliquidated corporate property, only if the corporate-level combination occurred for corporate-level business purposes. The Court reasoned that Congress wanted to facilitate normal corporate readjustments to facilitate business transactions.8 Therefore, COI and COBE can be viewed as the corporate version of the generic requirements for all nonrecognition rules, and business purpose can be viewed as the reason why Congress allowed nonrecognition for reorganization exchanges.

What does that differentiation tell us about the issue addressed by this article? It suggests treating business purpose as a requirement separate and distinct from COI and COBE. But it does not prevent treating COBE as a business purpose for acquisitive reorganizations. COBE necessarily is the business purpose for the typical acquisitive reorganization (for example, when one airline acquires another),9 and questions may arise only when there is a competing tax reduction purpose or the parties cannot be assumed to deal at arm's length.

But a competing purpose is irrelevant unless it wholly negates the COBE business purpose, because there is no weighting of purposes for reorganizations; if COBE exists, it is a business purpose, which is sufficient. The fact that COBE is defined in regulations makes this approach to business purpose particularly reliable and efficient to apply.

2. The problematic case.

a. Summary. Corporate reorganizations with competing tax reduction purposes can be grouped into four classes, three of which attract the most attention but are distinguishable and do not control the outcome for the fourth class, at which this article is aimed.

The courts and the IRS have relied on finding a tax reduction purpose to deny tax benefits primarily in three types of reorganizations, the first two of which are not the acquisitive reorganizations that require COBE: (1) corporate divisions; (2) recapitalizations of a single corporation; and (3) multi-step transactions that could be characterized as a reorganization or not by integrating the steps.

When these three categories of transactions are subtracted from the universe of possible reorganizations, and assuming that the single-step acquisition meets the formal section 368 requirements and COI and COBE are satisfied, the transactions remaining are acquisitive reorganizations involving two (or three, in triangular cases) corporations. Single-step acquisition includes for this purpose well-defined two-step transactions that the code or Treasury recognizes as standard reorganizations, such as the C or D reorganization that involves both an asset transfer and a liquidation, or a stock transfer plus liquidation that is commonly recognized as a C or D reorganization.10

The premise of this article is that it is duplicative and inappropriate to apply a business purpose requirement to this fourth category of transactions. As a result, these single-step acquisitive reorganizations should qualify under section 368 without further investigation of purpose, even if they are also motivated in substantial part by a tax reduction purpose, such as eliminating a taxable corporate layer or acquiring a favorable tax attribute.

b. Divisive reorganizations. Although the business exigency language of Gregory has migrated into the general reorganization requirement, Gregory involved a corporate division for which there not only was no business purpose but also (applying current rules) no COI or COBE. In other words, no business was reorganized, acquired, or transferred. Congress reacted to Gregory by immediately amending the statute to deny nonrecognition treatment to divisions, but not to reorganizations generally.11 This shows that Congress understood then what we have since forgotten, that it was the divisive transaction that presented special problems and required special rules. Even after Gregory, it was thought that the inclusion of the A and C reorganizations in the list of permitted forms was evidence enough that Congress intended reorganization to be a means of eliminating a level of taxation.12

Indeed, as convoluted as section 368 may seem, the history of section 355 and its predecessors is far more so. The section 355 regulations long have contained a different and stronger requirement of business purpose than that stated in reg. section 1.368-1, no doubt because divisive transactions have a greater potential for bailout of corporate earnings.13 Reg. section 1.355-2(b) states: "A transaction is carried out for a corporate business purpose if it is motivated, in whole or substantial part, by one or more corporate business purposes." The regulation goes on at length to exclude shareholder business purposes and tax reduction purposes, and to flesh out a weighting scheme for these purposes. The case law precludes tax reduction purposes.14

None of these special rules apply by their terms to acquisitive reorganizations that otherwise satisfy section 368. Therefore, it is inappropriate to allow the no-tax-reduction-purpose aura of section 355 to bleed over into acquisitive reorganizations.

c. Recapitalizations. Next to corporate divisions, the most important context in which reorganization tax saving has been problematic is the replacement of equity with security debt, when an exchange could be a tax-free reorganization, either by recapitalizing a single corporation or in an acquisitive transaction. Indeed, these recapitalizations prompted the first articles on business purpose in the late 1940s.15

But when the Supreme Court decided in 1947 that replacement of equity with debt pro rata to continued stock ownership was not a reorganization, it disclaimed evaluating the motives of the taxpayer. The Court simply found in Bazley v. Commissioner16 the transaction to be effectively a dividend. Even now there is no clear rule that achieving the tax deduction for interest on the debentures could not be a purpose of a recapitalization reorganization.17 But when corporations lost the ability to exchange new debt for old equity without gain recognition to the shareholder, the Bazley issue began to recede in importance in the recapitalization context. Nevertheless, the E recapitalization is guarded by the peculiar "Bazley regulation," which can turn boot into a dividend in undefined circumstances.18

As stated above regarding divisions, the ghost of a different problem, here the Bazley problem, should not be allowed to affect the modern acquisitive reorganization.

d. Step transactions. Step transaction analysis must be applied to all reorganizations.19 Taxpayers and the IRS have recharacterized some multi-step transactions as reorganizations20 and others as not reorganizations.21 This analysis frequently involves investigation of the purposes of the transactions because step transaction treatment inevitably requires rejecting form, which usually is aided by evidence of intent. For example, the second Minnesota Tea Co. v. Helvering22 decision concluded in 1938 that boot in the reorganization was actually a payment to corporate creditors through the shareholders as conduits, based on an express understanding of the parties. Indeed Barnet Phillips IV treats the substance over form analysis as one meaning of the business purpose requirement.23 However, substance over form analysis also can be applied with purported disregard of taxpayer motives, as when the court claims to find that a transaction simply looks like something else.24

Nevertheless, that tax reduction purposes may be relevant to recharacterizing multi-step transactions has no bearing on the cases of single-step acquisitive reorganizations to which this article's analysis is limited. Yes, a reorganization might fail the COBE requirement if a related step disposes of the business on which COBE was based. But analysis of business purpose to link those steps so as to characterize the entire transaction is not relevant to the basic business purpose requirement for reorganizations.

e. The remaining fourth group of cases. After extracting these three groups of reorganizations, what is left is the single-step acquisitive reorganization, of type A, B, C, D, or G, in which a corporation acquires from a target, or acquires a target with, a significant line of business or historic business assets that will be used in a business. No further business purpose should be necessary to satisfy section 368 than the business acquisition itself, unless there is some weighting of purposes that can cause a tax reduction purpose to swamp the COBE business purpose; and there is none.

3. Treasury and IRS guidance does not preclude tax reduction purpose.

a. Treasury guidance. Section 368 is thought to require a business purpose for all reorganizations, but actually reg. section 1.368-1(b) and (c) and reg. section 1.368-2(g) contain four overlapping statements related to purpose, none of which literally requires a corporate nontax business purpose, and all of which can be satisfied by the satisfaction of COBE: (1) the reorganization must be "required by business exigencies"; (2) the reorganization must be "an ordinary and necessary incident of the conduct of the enterprise"; (3) there must be a "business or corporate purpose" for the change when a transaction is going to occur for other reasons and would be taxable as originally planned but the form of the transaction is changed at the last minute to try to satisfy the requirements of one of the six types of section 368(a)(1) reorganizations25; and (4) the transaction must be carried out for "reasons germane to the continuance of the business of a corporation a party to the reorganization."

These statements reflect several points:

  • They neither indicate that a shareholder purpose is sufficient nor preclude a shareholder purpose, and shareholder purposes inevitably dictate acquisitive reorganizations, particularly the downstream merger of a shareholder into its corporation.26
  • They do not indicate which corporation must have the business exigency, but either or both should suffice.27
  • Exigency in practice essentially means hopes and desires,28 because rulings commonly allow reorganizations to obtain mere operating efficiencies29: "to simplify the overall corporate structure of Target and the Acquiring group"30; "to simplify [acquirer's] corporate structure"31; to achieve "operating efficiencies, eliminating brand confusion"32; and to simplify corporate structure in downstream reorganizations.33
  • The most quoted requirement -- "business or corporate purpose"34 -- does not apply to a transaction that would not occur as a taxable transaction, which is typical of the combinations at issue here. Moreover, the Supreme Court's use of the phrase in Gregory was not to require a business or corporate purpose for every non-divisive reorganization; but the Court simply noted that there was no business or corporate purpose for that divisive reorganization.35
  • The regulations do not preclude a corporate tax saving purpose.36
  • The regulation links business continuity and purpose.37

b. Nontax business purpose? In summary there is no nontax business purpose requirement (in contrast to a business purpose that may or may not be to save taxes) for acquisitive reorganizations for section 368 purposes.38 There is no published guidance from Treasury or the IRS requiring a nontax business purpose for an acquisitive reorganization. Random discussions of a nontax business purpose in a few court cases, letter rulings, and technical advice memorandums are either distinguishable, adopted voluntary statements by taxpayers, sloppy, or just wrong.

An example of a random reference is TAM 8803001, which involved an unusual set of facts that are not well explained in the technical advice memorandum. Although it may seem tedious to closely examine a 24-year-old memorandum, it is important to do so, because that minor "guidance" can take on a life of its own and be referenced by generations of IRS personnel as the final authority.

A U.S. corporation controlled by foreign persons bought a building in the United States and "transferred" the building to a foreign corporation controlled by the same persons.39 The building was leased at a loss for several years, but when it turned profitable the foreign corporation exchanged the building with the U.S. corporation for stock of the U.S. corporation in what was claimed to be a Type C reorganization. The IRS agent asserted there was no reorganization because there was no nontax business purpose (the sole purpose was to combine the income-producing building with the losses of the U.S. corporation) and the technical advice memorandum addressed this issue.

The memorandum adopted the agent's theory that a nontax business purpose was required, but it did so on faulty grounds by citing five inapposite decisions: (1) one involving whether a corporation could join a consolidated group in 1943, not involving a reorganization40; (2) one involving a multi-step transaction that was not characterized as a reorganization41; (3) an unpublished district court opinion by Judge Wham (sic) that contained only eight one-line findings of fact and four one-line conclusions of law, holding that the merger of a shell corporation solely to obtain net operating losses was not a reorganization but was a sham42; (4) a decision in which the court never said a nontax business purpose was required but found a purpose other than acquiring the target's NOLs, stating wisely in a footnote that the IRS needed to be cautious about making qualification of reorganizations too difficult, because sometimes the IRS benefited by turning a tax-free liquidation into a reorganization with taxable boot43; and (5) a purported C reorganization acquisition of a related corporation with NOLs, but with no business, and the few remaining assets being sold immediately after the acquisition.44

Nevertheless, the technical advice memorandum found sufficient business purposes in improving the acquirer's balance sheet and improving internal cash flow. The field must not have liked the result of the memorandum because it was ultimately revoked with a statement that the facts were not sufficiently developed to determine whether the balance sheet and cash flow purposes were real.45

There are additional reasons to forgive IRS agents for assuming that a tax saving business purpose is a bad business purpose. Condemnation is heaped on nontax business purposes by the economic substance doctrine and section 7701(o), the definition used for "covered opinions" under Circular 230,46 and the already identified special rules applicable to purposes for corporate divisions. But none of those provisions apply to one-step acquisitive acquisitions, because the taxpayers will be "claiming . . . tax benefits in a manner consistent with the statute and Congressional purpose."47

c. No weighting. If the IRS were to recognize that a tax saving business purpose is a qualifying business purpose for section 368 purposes in an acquisitive reorganization where COBE is satisfied, the weight of the tax saving business purpose versus other business purposes would be irrelevant. But even without this recognition, the practical outcomes are usually the same because the presence of any other clear business purpose is sufficient to satisfy the regulation's requirements.

That is, in contrast to the reg. section 1.355-2(b)(1) requirement that a "transaction is carried out for a corporate business purpose if it is motivated, in whole or substantial part, by one or more corporate business purposes," reg. section 1.368-1(c) rejects only reorganizations with "no business or corporate purpose." Commentators have interpreted this and various cases to mean that a minor business purpose can be sufficient despite the existence of a substantial tax savings purpose,48 and no published authority refutes that view.

C. Acquisitive Reorganizations With COBE

1. COBE. A careful observer of the case law proposed 60 years ago that the business purpose requirement for reorganizations was unnecessary because the subjective issue of motive was always answered objectively when the target shareholders retained an equity interest in the target property or unliquidated business.49 He cited not only the Bazley opinion,50 but also other opinions that came close to saying continuity of interest in a continuing business was enough in the face of tax reduction motives.51

Since then, the COBE regulation came into existence (1980) and was substantially revised in 1998. Before 1980, reg. section 1.368-1(b) required only that there be business continuity and that the surviving corporation be engaged in business.52 Today either a significant line of business must continue or a significant portion of historic business assets must be used in a business. Only the target is required to satisfy COBE. In some cases the acquiring entity will have no business.

The IRS and the courts treat COBE most prominently as justifying finding reorganizations in the liquidation-reorganization cases.53 Of course, in these cases the taxpayer does not want a reorganization and the IRS does. But that role reversal does not disprove the point that these taxpayers had a tax reason not to reorganize but the transactions had COI and COBE. If these cases are viewed as reorganizations, so should cases in which the taxpayer intends to reorganize for tax reduction purposes and there is actual business and shareholder continuity.54 Other commentators have recognized that business continuity can prove business purposes and lack of business continuity can disprove business purpose.55

In a related-party merger not involving the Service's imposition of a D reorganization construct on a taxpayer, the Tax Court has cited the liquidation decisions and stated, "In passing to our examination of the third criterion, we note, however, that where continuity of business enterprise is found, business purpose ordinarily presents no problem."56 Indeed, when the IRS asserts a D reorganization that the taxpayer does not want, the taxpayers have defended themselves by asserting a business purpose, which the court held did not prevent a D reorganization.57 In Norman Scott, one of the most widely cited related corporation reorganization cases involving loss transfers, the Tax Court did not even consider the business purpose.58

The continuation of the business of a corporation acquired for tax avoidance purposes has been recognized as a reason not to apply section 269 or otherwise deny a tax benefit (and vice versa),59 and therefore should carry even more weight in finding a reorganization. That the special business continuity requirements under section 355(b) do not preclude a special business purpose requirement under section 355 is not inconsistent with the premise of this article, given the heightened problem of earnings and profits bailouts in spinoffs.

Considering a business acquisition to be an indicia of business purpose is consistent with Cottage Savings.60 Because an actual exchange of the interests in mortgages occurred, that the transaction was wholly aimed at tax reduction did not prevent the loss recognition.61 By analogy, that a business or business property is actually acquired is more relevant than a motive of tax reduction. Reg. section 1.1002-1, the primary gatekeeper of the nonrecognition rules, says nothing about business purpose. Moreover, the approach of this article is congruent with the basic form over substance approach of the code, which relieves the system from the difficult process of motive fact-finding in 99 percent of cases.62

2. Unrelated party acquisitions. In unrelated corporate party cases that are problematic regarding business purpose, the target satisfies COBE, but one important purpose for combining the corporations is clearly to join their different tax attributes. In the worst case, the acquirer has NOLs and no business and the target has an income-producing business (if the target had NOLs and no business, COBE could not be satisfied).

The existence of sections 269, 381, 382, 383, 384, 1551, and 1561 and the consolidated return separate return limitation year (SRLY) regulations shows that Congress (and Treasury) clearly understand that corporations are acquired or combined for purposes of attribute carryover. Some of those code and regulation sections assume a carryover and address the concerns Congress had about reorganization carryovers. The rules targeted against tax reduction business purposes are just that -- targeted and not generally applicable prohibitions of tax-reduction-purposed reorganizations. Although the tax benefits at which sections 382, 383, and 384 aim do not necessarily require a reorganization, section 269 generally does.63

The acquisition of the stock or assets of a wholly unrelated target by an acquiring corporation can be a reorganization under section 368 only if there is a continuity of target shareholder interest, a continuity of target business, and the so-called business purpose requirement is satisfied. However, in 100 percent of the cases in which the first two requirements are met, the third is met because an acquisition of a business or business assets to be used in a continuing business will occur. This is a business purpose and the only business purpose in standard acquisitive reorganizations, from the acquirer's viewpoint.64

If the acquisition of an unrelated corporation that otherwise qualifies as a reorganization also brings with it tax benefits (for example, interest deductions for debt issued as boot to the target's shareholders; section 381 NOL carryovers subject to the section 382 limitation; and the ability to offset future losses of either business against future income of the other, subject to sections 382 and 384), obtaining these benefits may be another purpose for the acquisition without destroying reorganization treatment. This fact is supported by (1) the existence of antiabuse rules in the code that assume a carryover has occurred in a reorganization, (2) the absence in the section 368 regulations of any effort to quantify the "business purpose," in contrast to the "substantial part . . . corporate business purpose" that is not a tax-reducing-purpose requirement in reg. section 1.355-2, and (3) the absence of any business purpose requirement from reg. section 1.1002-1.

3. Related corporation combinations.

a. Summary. When the owners of some or all of the stock of two corporations want to combine the corporations for purposes of current or prospective corporate tax savings, they almost always want the combination to be tax free. The problematic scenarios are either:

  • combining brother-sister corporations owned by individuals or foreign corporations, so that favorable tax attributes (for example, losses) of one corporation can be enjoyed by the other (subject to various limitations, including sections 269, 367, 382, and 384 and the SRLY rules); or
  • combining parent-subsidiary corporations, whether wholly owned or not, to share favorable tax attributes, or to eliminate an extra level of corporate tax.

b. Related brother-sister. To be tax free, a brother-sister combination must qualify either as a section 351 exchange or a B reorganization, or as a section 368 asset reorganization (A, C, or D). The IRS asserts that section 351 requires a business purpose, but the regulations do not state this. To qualify as a reorganization, a brother-sister combination must satisfy COBE, meaning that one corporation will acquire the business or business assets of the other. Making this sort of acquisition is necessarily a business purpose of the acquirer, at least. There is no reason why the presence of the same sort of tax reduction purposes discussed above in unrelated party acquisitions should detract from the qualification as a reorganization any more than in the unrelated case. Although possible questions about arm's-length pricing might arise, they are not relevant to the business purpose question.

In the brother-sister combination context, the reorganization usually would not occur if it were taxable. Therefore, if the common shareholders of two corporations choose (in cooperation with other shareholders if necessary) to combine the corporations by reorganization for the purpose of reducing the aggregate corporate level taxes that may be owed in the future by the two corporations operating separately, the reorganization is required by business exigencies of the corporations and is an ordinary and necessary incident to the conduct of their enterprises. What greater business exigency can there be than to reduce tax cost through methods made available by Congress?

Of course, satisfying the requirements of a reorganization does not mean that the taxpayer is home free. The list of antiabuse rules cited above may be applied, most prominently sections 269, 382, and 384. But in most cases there will be no need to apply those rules if there is no reorganization, which again proves that the existence of the rules assumes the ability to accomplish at least an acquisitive reorganization even with tax reduction purposes.

The best citation for brother-sister tax-motivated combinations is Libson Shops. The Supreme Court considered the brother-sister mergers and ruled that under the carryover statute the losses could not be combined with the incomes, but the Court expressed no interest in the business purpose for the mergers, once it found that section 269 could not apply.65

c. Related up-downstream. To be tax free, a parent-subsidiary combination must qualify as a section 332 liquidation up, an A or C reorganization up, or a section 368 reorganization down. Section 332 does not require a business purpose. Moreover, because an 80-percent-owned subsidiary can liquidate into its parent corporation for any or no reason, the IRS has never been concerned with a downstream merger of a parent corporation related at the same 80-percent-plus level. Thus, the cases in which questions arise involve the parent that cannot receive its subsidiary's assets in a section 332 liquidation.

In those cases, the consequences of a successful IRS attack would be either a taxable liquidation of the subsidiary if it is the target, or if the parent is the target, its taxable sale of assets to the subsidiary followed by its taxable liquidation (unless it can effect a section 332 liquidation or reorganization up into another corporation, or section 351 applies). The fundamental reason why the taxpayer can choose to merge down in a reorganization rather than sell assets and liquidate is that the IRS recognizes the taxpayer's choice to select the nontaxable choice provided by Congress through structuring that would be meaningless but for tax saving.66

However, it is easy to gloss over the scope of the choice too quickly.67 Although the IRS does agree that taxpayers can choose a tax reduction method provided by Congress solely to enjoy the tax reduction, that cannot eliminate the business purpose requirement for reorganizations because it is written into the reorganization regulation itself.

i. Upstream. Upstream reorganizations (C or A) involve the movement of a real business or business assets (as contrasted with the holding company problem that can exist in downstream deals) and present fewer business purpose concerns. This is particularly true because Treasury blessed the existence of continuity of proprietary interest even though the old stock of the subsidiary is not replaced with new stock of the acquirer (aside from the deemed momentary exchange that occurs in tax theory).68

ii. Downstream. Downstream mergers are a relatively ancient subject in corporate tax, originally called "downstairs mergers."69 The most problematic cases involve pure holding companies with a minority interest in the subsidiary, because the target has no business or business assets of its own, and even a look-through approach seems less likely. When the corporate parties to one of these mergers are not already filing consolidated returns, the downstream merger almost inevitably occurs in whole or in part to eliminate multiple levels of both state and federal income taxation.

If eliminating tiers of corporations requires a nontax business reason, a nontax purpose can be plausibly alleged in all but the pure holding company/small minority cases, as shown:

  • when the target has any sort of COBE qualifying business or business assets other than the stock of the acquiring corporation, which can include nonbusiness investment assets70;
  • when the target owns enough of the subsidiary to be viewed as controlling it, because control indicates multiple levels of management, which are always ripe for downsizing under the rubric of simplification or efficiency;
  • and control cases should exist down to at least 50 percent of the vote of the subsidiary, and even lower by analogy to section 302 (in which the large minority shareholder can form a control block with another shareholder, for purposes of rendering the redemption essentially equivalent to a dividend);
  • when the target cannot be said to be in control of the subsidiary, the combining corporations can still plausibly assert that they are squeezing out minority shareholders (if that occurs);
  • when the claim can be made that the combination improves the balance sheet or cash position of the subsidiary (there may be intercompany debt);
  • when the target in a downstream merger is a large minority shareholder that the subsidiary wants to eliminate, and to replace with multiple shareholders of the target, which cannot exert a voting bloc; and
  • when the price of the acquisition of the subsidiary's stock held by the target is cheap (which is the reason for thousands of stock buybacks), and that cheapness may be facilitated by the nonrecognition nature of the transaction.

Virtually the only cases left in which the parties may not be able to come up with one of these real, or at least plausible, purposes is the downstream merger of a pure holding company with only one asset that counts for business continuity purposes -- the minority interest in stock of the survivor.71 Even in these cases, a combination can produce a simplification of structure as far as the holding company is concerned, which should suffice for the stated purpose of the combination. But when the percentage is small indeed, the subsidiary may have no reason to care about the parent's tax problems and therefore will cooperate only when it has a true business reason, which is usually eliminating shares at a favorable price.

The IRS chief counsel long has viewed a corporation's acquisition of its own stock as the sole asset acquired in a reorganization as satisfying the COBE requirement. However, published guidance is limited to cases in which the parent owned all of the subsidiary's stock, and is based on a look-through theory that attributes the business of the surviving subsidiary to the parent.72 In letter rulings, the IRS has extended that principle to holding companies that have as their only relevant asset a minority interest in the survivor.73 The IRS essentially was forced to admit business continuity in the less-than-sole-ownership cases because the Second Circuit approved in 1942 in Commissioner v. Estate of Gilmore74 a downstream merger of a pure holding company with a bare majority of the stock of the survivor.

It would be inconsistent for the IRS now to assert that the business purpose that always attends actually acquiring a business or business asset does not exist when the business asset is the subsidiary's own stock, despite agreeing that acquiring that stock satisfies the business continuity requirement.

iii. General Utilities repeal. Before 1986, there had been little concern about the parent-subsidiary combination for the purpose of eliminating an extra layer of federal income tax because the parties could escape a level of corporate tax at the price of a capital gain on stock. Thus, when the Gilmore decision blessed the downstream merger in 1942, there was little concern about eliminating layers of corporate tax because the corporate tax was set up to make that easy to accomplish.75

However, with the repeal of the General Utilities doctrine through the Tax Reform Act of 1986, Congress added section 337(d), which enigmatically invited Treasury to consider whether special regulations were required to effectuate the repeal. No regulations were immediately pursued and the IRS continued to rule favorably on downstream reorganizations.76 Rev. Proc. 94-76 stated that the IRS was concerned that a reorganization of a less than 80 percent shareholder with the corporation could be used to inappropriately circumvent General Utilities repeal.77 As a result, the IRS would not rule on these transactions through 1998. The threatened alternative to reorganization treatment would have been treating a downstream merger as a taxable liquidation of the merging corporation.78 Treasury ultimately determined that the only real danger was allowing a shareholder to obtain a fair market value in corporate assets without any corporate recognition of gain or paying tax on the gain, that is, the signature method of corporate liquidation pre-General Utilities repeal. Therefore, Treasury found no threat to General Utilities repeal in the downstream merger as a reorganization. The IRS announced in Rev. Proc. 99-3 that it would begin issuing rulings again.

Therefore, there is currently no basis to infer that repeal of the General Utilities doctrine forbids eliminating corporate layers as a purpose for a reorganization, absent regulations under section 337(d), which Treasury decided not to issue.79 Although the IRS will never give up the business purpose requirement,80 it needs to accept the fact that reducing levels of corporate tax is a good business purpose, when COBE is satisfied.

D. Where Are We Today?

LTR 201214013 applied a 55-year-old revenue ruling to treat a subsidiary liquidation as a downstream D reorganization, thus preserving the basis in the liquidating subsidiary's stock, which would not be the case if it had liquidated under section 332. Holdco owned Parent (a pure holding company), which owned Target Parent (a pure holding company), which owned Target Sub. Holdco wanted to own Target Sub directly, but evidently did not want to lose its basis in its Parent stock and wanted to maintain Parent as an entity.

To accomplish this result tax free, the taxpayer proposed that Target Parent recapitalize its old stock for new stock (so Parent could claim it transferred its assets for stock of the acquirer), Parent convert to disregarded entity status, and that Target Parent merge into Target Sub. The stated purpose was "achieving operating efficiencies, eliminating brand confusion, and certain other business objectives."

The chief counsel ruled that Parent was the target in a D reorganization downstream into Target Parent and that Target Parent was the target in an A reorganization downstream into Target Sub. The ruling relied on (but did not cite) Rev. Rul. 57-465,81 which treated a foreign-to-foreign downstream merger as a D reorganization for the benefit of foreign corporations that could not then effect offshore A reorganizations.

The assets that Parent transferred to Target Parent in the D reorganization were the stock of Target Parent. The IRS went along with treating the preliminary recapitalization of Target Parent as part of the Parent reorganization. As a result of the recharacterizations, Holdco was able to retain its basis in its Parent stock and to retain Parent as an entity for state law purposes but eliminate two tiers of holding companies between itself and its operating subsidiary.

This is a wonderful result, and the reorganization was not even one step. The ruling, in effect, applies to a multistep reorganization the principle of COBE satisfying business purpose that this article would be satisfied to apply to single step reorganizations. This ruling might inspire some to exclaim, "Is this a great country or what?"

Indeed it is, and in this country saving on corporate taxes through acquisitive reorganizations that meet all of the other requirements of section 368, particularly COBE, should be purpose enough, as it must have been in LTR 201214013. If trafficking in NOLs or some other tax attribute is facilitated, let the rules written for those purposes handle it.


1 Doc 2012-7306, 2012 TNT 68-28.

2 Rev. Proc. 2012-1, 2012-1 IRB 1, Doc 2011-27275, 2012 TNT 1-23. Rev. Proc. 86-1, 1986-1 C.B. 395, similarly required "a full and precise statement of the business reasons for the transaction."

3 As pointed out by Cecil J. McCaffrey, "Business Purpose -- Or Business Continuation," 30 Taxes 187 (1952).

4 The core regulatory definition of reorganizations incorporating these court decisions requires that they be "readjustments of corporate structures made in one of the particular ways specified in the Code, as are required by business exigencies and which effect only a readjustment of continuing interest in property under modified corporate forms." Reg. section 1.368-1(b).

5 499 U.S. 554 (1991).

6 See Notice of Proposed Rulemaking, 44 Fed. Reg. 77813 (1979), adopting the original COBE regulation and citing reg. section 1.1002-1(c).

7 293 U.S. 465, 469 (1935).

8 See Peter Faber, "Business Purpose and Section 355," 43 Tax Law. 855, 858 (1989) (tracing the legislative history of the reorganization provisions).

9 By analogy, reg. section 1.355-2(d)(3)(iii) treats the fact that a corporation doing a spinoff is publicly held as "evidence of nondevice."

10 See, e.g., Rev. Rul. 2004-83, 2004-2 C.B. 157, Doc 2004-14660, 2004 TNT 138-9.

11 See Hoffman F. Fuller, "Business Purpose, Sham Transactions and the Relation of Private Law to the Law of Taxation," 37 Tul. L. Rev. 355, 36 (1963).

12 Arthur M. Michaelson, "Business Purpose and Tax Free Reorganization," 61 Yale L. J. 14, 21, n.30 (1952) (citing Commissioner v. Estate of Gilmore, 130 F.2d 791 (3d Cir. 1942)).

13 See Faber, supra note 8, at 884.

14 See, e.g., Estate of Parshelsky v. Commissioner, 303 F.2d 14 (2d Cir. 1962).

15 Murray M. Flack, "Where Tax Saving Is Behind the Business Purpose," 23 Taxes 910 (1945); Harvey M. Spear, "Corporate Business Purpose in Reorganization," 3 Tax L. Rev. 225 (1947-1948).

16 331 U.S. 737, 742 (1947).

17 See reg. section 1.354-1(d), Example 2, showing that taxable debt securities can be received in exchange for stock in a reorganization.

18 Reg. section 1.301-1(l).

19 Reg. section 1.368-1(a).

20 The reincorporation doctrine is the primary example. See Jasper L. Cummings, Jr., "Form Versus Substance in the Treatment of Taxable Corporate Distributions," 85 Taxes 119 (Mar. 2007); Cummings, "The Current State of Liquidation-Reincorporation," 89 Taxes 25 (Apr. 2011). For an early taxpayer victory on this basis, see King Enterprises Inc. v. United States, 418 F.2d 511 (Ct. Cl. 1969).

21 Gregory is the primary example. Also, during the era when it was thought that COI required continuing ownership of the acquirer's equity, a planned sale of that equity could disqualify a reorganization under a step approach. See McDonald's Restaurants of Illinois Inc. v. Commissioner, 688 F.2d 520 (7th Cir. 1982).

22 302 U.S. 609 (1938).

23 Phillips, Portfolio 770-4th: Structuring Corporate Acquisitions -- Tax Aspects, section VII.A.2. Note that Phillips states that a valid nontax purpose for undertaking an acquisition in the first place is required, although as stated above, that statement is not inconsistent with the premise of this article. But see Associated Wholesale Grocers v. United States, 927 F.2d 1517 (10th Cir. 1991) (business purpose does not preclude application of step transaction analysis).

24 This was said to be the case in Bazley. See also Rose v. United States, 640 F.2d 1030 (9th Cir. 1981) (finding a liquidation reincorporation reorganization purportedly without regard to tax savings motives).

25 Reg. section 1.368-1(c) ("A scheme, which involves an abrupt departure from normal reorganization procedure in connection with a transaction on which the imposition of tax is imminent, such as a mere device that puts on the form of a corporate reorganization as a disguise for concealing its real character, and the object and accomplishment of which is the consummation of a preconceived plan having no business or corporate purpose, is not a plan of reorganization"). This describes cases such as Gregory, 293 U.S. 465 (contemplated sale of X stock by Y changed into spinoff of stock of Z holding X stock, followed by liquidation of Z and sale of X stock by shareholder of Y; the terminology of the regulation was taken directly from the opinion on p. 469, which the Court said was not an issue of motive but of what happened); Bazley, 331 U.S. 737 (stock exchange coupled with debenture distribution was not a recapitalization but a dividend of the debentures); West Coast Mktg. Corp. v. Commissioner, 46 T.C. 32 (1966) (attempted section 351 exchange followed by purported Type B reorganization recast as sale of property for stock).

26 The law on shareholder purpose in reorganizations generally is sparse, and all of it arises in spinoff situations, which should be considered sui generis, because the section 355 regulations address shareholder purpose and the section 368 regulations do not. Estate of Parshelsky, 303 F.2d 14; Lewis v. Commissioner, 176 F.2d 646 (1st Cir. 1949); reg. section 1.355-2(b)(2). In contrast, the section 368 regulations say nothing about shareholder purpose.

27 In theory the corporation being reorganized (i.e., the target) would be expected to have the purpose to be reorganized, but in practice in the acquisitive context it is always acquiring and the target shareholders who have the motivating purposes, and no different rule should apply when the corporations are previously related. See Mark Silverman et al., "Establishing Business Purpose in a Transparent World," Doc 2004-16634, 2004 TNT 159-17.

28 See, e.g., Lewis v. Commissioner, 10 T.C. 1080, 1087 (1948) ("readjustments, for example, which are helpful, useful, advantageous, or appropriate in the light of corporate business experience"), aff'd, 176 F.2d 646 (1st Cir. 1949).

29 Rev. Rul. 55-45, 1955-1 C.B. 34, ruled that merger of two U.S. subsidiaries of a Canadian parent to "promote greater business efficiency and economy in management of X and Y Corporations" was a reorganization. More recent letter rulings merely recite taxpayers' alleged purposes, without approving them.

30 LTR 9024004.

31 LTR 8829043 (63 percent shareholder combined with public acquiring corporation, without target transferring even its shares in acquiring; D reorganization).

32 LTR 201214013 (downstream D), Doc 2012-7306, 2012 TNT 68-28.

33 Commissioner v. Kolb, 100 F.2d 920 (9th Cir. 1938); Helvering v. Schoellkopf, 100 F.2d 415 (2d Cir. 1938).

34 Reg. section 1.368-1(c) (last sentence). The "business or corporate purpose" language derives from Gregory, 293 U.S. at 469 (the Court said the issue was not one of motive but of what actually happened). Unfortunately, it has been adapted by the courts to recharacterize transactions that the taxpayer did not present as reorganizations, some of which involve the last-minute insertion into a transaction of a step designed to reduce taxes that would have occurred anyway and would have been taxable, e.g., Basic Inc. v. United States, 549 F.2d 740 (Ct. Cl. 1977) (court disregarded the dividend of stock to be sold); and some of which involved application of the economic substance doctrine, e.g., Coltec Ind. Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006), Doc 2006-13276, 2006 TNT 134-10. However, sometimes courts reject the IRS's business purpose arguments in those non-reorganization cases, after finding independent significance to each step, whether introduced at the last minute or not. See, e.g., Esmark Inc. and Affiliated Cos. v. Commissioner, 90 T.C. 171 (1988), aff'd, 886 F.2d 1318 (7th Cir. 1989).

35 See McCaffrey, supra note 3, at 187, 188.

36 Rarely do rulings happen to contain a nonstandard, no-tax-avoidance-purpose representation. LTR 200732001, Doc 2007-18637, 2007 TNT 156-17.

37 Reg. section 1.368-2(g) ("must be undertaken for reasons germane to the continuance of the business of a corporation a party to the reorganization").

38 Cf. U.S. Shelter Corp. v. United States, 13 Cl. Ct. 606 (1987) (addressing the evaluation of tax and nontax purposes for section 269 purposes).

39 The technical advice memorandum does not explain what the foreign corporation exchanged for the building, if anything.

40 David's Specialty Shops v. Johnson, 131 F. Supp. 458, 460 (S.D.N.Y. 1955).

41 West Coast Marketing Corp. v. Commissioner, 46 T.C. 32, 40 (1966) (ruling that a taxpayer intending to sell property could not incorporate the property and reorganize the new corporation to avoid recognition of the gain in the property).

42 Continental Sales & Enterprises Inc. v. United States, No. 61-C-1568 (N.D. Ill. 1963) (obviously there was no continuity of business).

43 W-L Molding Co. v. Commissioner (Appeal of Laure), 653 F.2d 253 (6th Cir. 1981).

44 Wortham Machinery Co. v. United States, 521 F.2d 160, 163 (10th Cir. 1975).

45 TAM 8941004. A commentator said the agent must not have audited the facts sufficiently in the first attempt, but that explanation for the second technical advice memorandum is not supported by what the memoranda say. The facts did not change and the procedural posture of the case did not change; most likely the field simply pushed back on the first technical advice memorandum and the second memorandum simply receded on the facts without changing its statements, stating that it did not have sufficient facts to evaluate two of the purposes. Lee A. Sheppard, "Cold Comfort: What Should the IRS Rule On?" Tax Notes, Nov. 13, 1989, p. 813.

46 Circular 230, section 10.35.

47 Id., section 10.35(b)(10).

48 See Silverman et al., supra note 27, at section 32. See Arthur M. Michaelson, "'Business Purpose' and Tax Free Reorganization," 61 Yale L. J. 13, 33 (1952) (pre-Bazley law).

49 See McCaffrey, supra note 3.

50 311 U.S. at 740 ("But there are circumstances where a formal distribution, directly or through exchange of securities, represents merely a new form of the previous participation in an enterprise, involving no change of substance in the rights and relations of the interested parties one to another or to the corporate assets. As to these, Congress has said that they are not to be deemed significant occasions for determining taxable gain.").

51 Lewis v. Commissioner, 160 F.2d 839 (1st Cir. 1947), and Lewis v. Commissioner, 176 F.2d 646 (1st Cir. 1949) (a liquidation reincorporation decision containing confusing statements about purpose, but basing the finding of reorganization on the continuation of the business in a corporation owned by the same persons; the Supreme Court cited Lewis for continuity in Commissioner v. Clark, 489 U.S. 726, 741 (1989)); Survaunt v. Commissioner, 162 F.2d 753 (8th Cir. 1947).

52 See Rev. Rul. 63-29, 1963-1 C.B. 77.

53 See supra note 20.

54 Payne v. Commissioner, T.C. Memo. 2003-90, Doc 2003-7952, 2003 TNT 60-8 (explaining Lewis as involving business purpose because the business continued).

55 See Fuller, supra note 11, at 362. Cf. Stephen S. Bowen, "Whither Business Purpose," 80 Taxes 275, 277 (2002) (implying that when the economic substance of an acquisition is present, that is sufficient, but not addressing the COBE issue).

56 American Bronze Corp. v. Commissioner, 64 T.C. 1111, 1124, n.8 (1975). Cf. Appeal of Laure, 653 F.2d 253 (6th Cir. 1981) (indicating that cost savings purposes would have to be substantial to justify a reorganization, but then finding a purpose in the business continuity).

57 Rose, 640 F.2d 1030.

58 Norman Scott Inc. v. Commissioner, 48 T.C. 598 (1967), AOD LEXIS 104 (1967).

59 See Timothy W. Ulrich, "The Business Purpose Test Under Section 269: A Continuing Dilemma," 40 Brook. L. Rev. 658, 681 (1974), citing New Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934), and Libson Shops v. Koehler, 353 U.S. 382 (1957).

60 Cottage Savings, 499 U.S. 554 (1991).

61 See Robert S. Summers, "A Critique of the Business-Purpose Doctrine," 41 Or. L. Rev. 38, 40 (1961).

62 Id. at 41-42 (arguing for abandonment of the business purpose doctrine); William F. Nelson, "Limits of Literalism: The Effect of Substance Over Form, Clear Reflection and Business Purpose Considerations on the Proper Interpretation of Subchapter K," 73 Taxes 641, 645 (1995).

63 Reg. section 1.269-6, Example 2, posits a merger for the principal purpose of acquiring the target's NOLs and states, "If the merger qualifies as a reorganization to which section 381(a) applies the entire net operating loss carryovers will be disallowed under the provisions of section 269(a) without regard to the application of section 382." See also U.S. Shelter Corp. v. United States, 13 Cl. Ct. 606 (1987) (reorganization assumed to have a one-third purpose to obtain NOLs and issue was application of section 269, not whether section 368 applied).

64 See generally Silverman, supra note 27. Cf. Bowen, supra note 55, at 280.

65 Libson Shops, 353 U.S. 382 ("We do not imply that a question of tax evasion or avoidance is involved. Section 129 (a) of the 1939 Code, as amended, does contain provisions which may vitiate a tax deduction that was made possible by the acquisition of corporate property for the 'principal purpose' of tax evasion or avoidance. And that section is inapplicable here since there was no finding that tax evasion or avoidance was the 'principal purpose' of the merger. The fact that section 129 (a) is inapplicable does not mean that petitioner is automatically entitled to a carry-over. The availability of this privilege depends on the proper interpretation to be given to the carry-over provisions. We find nothing in those provisions which suggests that they should be construed to give a 'windfall' to a taxpayer who happens to have merged with other corporations. The purpose of these provisions is not to give a merged taxpayer a tax advantage over others who have not merged. We conclude that petitioner is not entitled to a carry-over since the income against which the offset is claimed was not produced by substantially the same businesses which incurred the losses."). See also New Colonial Ice, 292 U.S. 435 (reorganization occurred solely for business purposes but ruled losses of old corporation could not be combined with income of new corporation).

66 The classic cite is Rev. Rul. 75-161, 1975-1 C.B. 114 (merger one way and section 357(c) gain recognized; the other way, not).

67 Cf. Robert Willens, "Downstream Transactions Will Not Be Recast as Liquidations," 234 DTR J-1 (Dec. 6, 2007) (assuming the business purpose analysis is over once taxpayer is faced with a taxable and nontaxable choice).

68 Reg. section 1.368-1(e)(1) and (e)(6), Example 7 (70-percent-owned subsidiary merges into parent, satisfying continuity of proprietary interest).

69 There are other peculiarities of downstream reorganizations that are not pursued here. See, e.g., Rev. Rul. 58-93, 1958-1 C.B. 188 (recasting a drop down and a merger up as a merger up and a drop down).

70 See Werner Abegg v. Commissioner, 429 F.2d 1209, 1213 (2d Cir. 1970) (surely a personal holding company can engage in a tax-free reorganization).

71 At one time a common way to create a pure holding company was a C reorganization without the distribution of the stock of the acquirer by the target, which remained in existence. See World Serv. Life Ins. Co. v. United States, 471 F.2d 247 (8th Cir. 1973).

72 Reg. section 1.368-1(d)(1) now states of the business continuity requirement: "The application of this general rule to certain transactions, such as mergers of holding companies, will depend on all facts and circumstances." This statement derives from Rev. Rul. 85-198, 1985-2 C.B. 120, and Rev. Rul. 85-197, 1985-2 C.B. 120, which effectively attribute a subsidiary's businesses to its holding company parent.

73 LTR 9104009 (34.48 percent); LTR 9506036, 95 TNT 29-25 (Petrie Stores ruling; 14 percent interest in the survivor); LTR 200037001, Doc 2000-23891, 2000 TNT 181-24, and LTR 200037002, Doc 2000-23892, 2000 TNT 181-25 (unspecified interest in public company acquirer); LTR 200747006, Doc 2007-25964, 2007 TNT 227-12 (5 percent interest in survivor).

74 130 F.2d 791, acq., 1946-2 C.B. 2. This decision is most commonly cited as evidence that tax reduction can be a legitimate purpose for a downstream reorganization. See William F. Nelson, "Limits of Literalism: The Effect of Substance Over Form, Clear Reflection and Business Purpose Considerations on the Proper Interpretation of Subchapter K," 73 Taxes 641, 645 (1995), citing also Edwards Motor Transit Co. v. Commissioner, T.C. Memo. 1964-317.

75 Nelson, supra note 74.

76 See, e.g., LTR 9506036 (Petrie Stores; P owned 14 percent of stock of S, which constituted 85 percent in value of P's assets; transfer of all of P's assets to S solely in exchange for S voting stock constituted good C reorganization); LTR 9102040 (P's only asset was a 31 percent stock interest in S; transfer of S stock back to S in exchange for S stock, coupled with complete liquidation of P, held to be D reorganization); LTR 9212018 (downstream merger of P into S was valid reorganization even though P's principal asset was 17 percent of the stock of S). See also Rev. Rul. 78-47, 1978-1 C.B. 113 (concluding that valid C reorganization occurred when P transferred all of its assets (other than its S stock) to S solely in exchange for S stock, even though P's preexisting 5 percent interest in S stock constituted 71 percent in value of P's assets).

77 See Eric Solomon, "Corporate Combining Transactions," 73 Taxes 829, 831 (1995) (identifying as option 1 doing nothing because "combining transactions" did not violate the intent of Congress in General Utilities repeal). See generally comments of American Bar Association Section of Taxation Affiliated and Related Corporations Committee members to Treasury concerning downstream mergers (July 14, 1995), Doc 95-7241, 95 TNT 146-53.

78 See LTR 9104009. In related Notice 94-93, 1994-2 C.B. 563, Doc 94-8648, 94 TNT 188-4, the IRS addressed an inversion transaction that is functionally similar to a downstream merger, but by which uneconomic losses could be created, and it stated that it would issue regulations to ensure the recognition of the proper amount of income, but it did not preclude the potential for a B or section 368(a)(2)(E) reorganization.

79 Jerred Blanchard so proved in "Combining Unaffiliated but Related Corporations: An Examination of the Proper Scope of Nonrecognition Provisions Following General Utilities Repeal," J. Corp. Tax (Aug. 1996). As shown by the discussion in text, Treasury later agreed with him, in effect. See also Deborah L. Paul, "Triple Taxation," 56 Tax Law. 571, 587 (2002-2003) (business purpose requirement not difficult to meet).

80 See comments of William Alexander at Practising Law Institute Conference reported in 224 DTR G-11 (Nov. 20, 2008).

81 1957-2 C.B. 250.


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