Tax News

CCH (cch.taxgroup.com) reports:

  The step transaction doctrine may override the treatment of a transaction as a reorganization where a merger of a subsidiary into a target corporation is followed by a liquidation of the target corporation, Treasury attorney-advisor Marc Countryman told practitioners on May 30. Countryman discussed the application of Reg. §1.368-2(k) to this transaction, as described in Rev. Rul. 2008-25, I.R.B. 2008-21, 986 (TAXDAY, 2008/05/09, I.5).

  The first step of the transaction looks like a reorganization. However, applying step transaction principles, Rev. Rul. 2008-25 treats the transaction as a taxable purchase of target stock followed by a Code Sec. 332 liquidation of the target. In this case, reorganization treatment is denied. Furthermore, the transaction is not a qualified stock purchase (QSP) under
Code Sec. 338 because the taxpayer did not elect this treatment. The ruling follows
Rev. Rul. 90-95, 1990-2 CB 67, on the application of step transaction analysis to a QSP.

  Countryman said that Treasury is studying whether there is a place for the Kimbell-Diamond doctrine ( Kimbell-Diamond Milling Co. , 14 TC 74, Dec. 17,454). It is clear that Kimbell-Diamond does not apply to a purchase. He said Treasury would like to issue guidance on a non-QSP.

 
Rev. Rul. 2008-25 considers unrelated parties, Countryman told reporters. There is no guidance, however, on a similar transaction where the parent corporation is related to the target corporation and there is a liquidation. In this case, there is no qualified stock purchase. He said that Treasury is also studying this transaction but no answer has been determined.

  Countryman also discussed a transaction in which a foreign subsidiary merges into a U.S. parent, followed by a transfer of assets to a different foreign controlled corporation. The transaction could be recast as an F reorganization, or the form could be respected. The answer is not clear. If the form is respected, there are potential consequences under the international tax provisions, such as a taxable distribution to the parent.

  Steve Fattman, special counsel to the IRS Associate Chief Counsel (Corporate), explained that CCA Letter Ruling 200818005 (TAXDAY, 2008/05/05, L.3) applies Rev. Rul. 68-602, 1968-2 CB 135. Thus, the cancellation of debt owed by a subsidiary is disregarded as a circular, transitory action and the liquidation of an insolvent subsidiary is not a tax-free liquidation. The ruling's conclusion derives from the preamble to 1999 proposed regulations under Code Sec. 338 that discussed the exact same fact pattern (NPRM REG-107069-97), Fattman commented.

  Countryman and Fattman spoke at a BNA Tax Management Luncheon held at the offices of Buchanan Ingersoll & Rooney in Washington, D.C.

By Brant Goldwyn, CCH News Staff