The ABA Tax Section has submitted comments to the IRS on Transfers of Assets and Stock Following a Reorganization. Here are the Executive Summary and Summary of Recommendations:

On August 18, 2004, the Treasury and the Service published Proposed Regulations that relate to the effect of asset and stock transfers on the status of certain transactions as reorganizations under § 368(a). The Proposed Regulations expand earlier proposed regulations, published on March 2, 2004, providing that a transaction otherwise qualifying as a reorganization will not be disqualified as a result of a transfer or successive transfers to one or more corporations controlled in each transfer by the transferor corporation of part or all of (i) the assets of any party to the reorganization or (ii) the stock of any party to the reorganization other than the issuing corporation. The March 2004 proposed regulations amended Reg. § 1.368-2(k), the continuity of business enterprise (“COBE”) regulations under Reg. § 1.368-1(d) and the definition of a party to a reorganization under Reg. § 1.368-2(f).

On May 26, 2004, members of the Committee submitted comments on the effect of transfers of assets of an acquired corporation to the issuing parent corporation after an acquisition otherwise qualifying as a triangular reorganization. In addition, on July 19, 2004, members of the Committee submitted comments on the March 2004 proposed regulations.

The Proposed Regulations expand on the March 2004 proposed regulations by addressing whether a transaction that otherwise qualifies as a reorganization continues to qualify when, pursuant to the plan of reorganization, assets of or shares of stock in the acquired corporation are distributed to certain related corporations or partnerships following the reorganization. Prop. Reg. §§ 1.368-2(f), (j), and (k). These are our comments on the Proposed Regulations.

We believe that, for the benefit of all concerned, the Proposed Regulations should be issued in final form as quickly as possible. Our recommendations are that Treasury and the Service should (1) provide additional guidance on failing the “substantially all” test, at a minimum in the form of a safe harbor; and (2) apply § 1504(a), rather than § 368(c), to determine membership in a “qualified group,” at least in the consolidated return context.