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RECENT DEVELOPMENTS
Supreme Court decisions in tax cases, when they occur, are always important. Part of the reason for their importance is that they are not always everything tax practitioners would want in terms of result and reasoning. The resulting mischief can extend forward for many years. Here we look at the IRS's latest effort in ongoing legislative and administrative efforts to deal with a pair of six decades old Supreme Court decisions concerning tax-free reorganizations that epitomize the mischief that so often results from decisions embodying empty formalism. They are, as some readers may have guessed, the famous Groman-- Bashford1 decisions, decided on the eve of World War II in 1937 and 1938. Rev. Rul. 2002-85,(2) our recent development, is but the latest in a long line of responses to various ill-effects of the decision on the soundness of the tax-free reorganization rules.3 Before turning to the ruling, let us first set the stage by reviewing the two decisions, a legislative response that entered the Internal Revenue Code in 1954, and finally regulatory amelioration of Bashford (but not Groman) in 1998.
Both Groman and Bashford addressed similar but different fact patterns that are straight-- forward enough to describe in the lingo of early 21st century tax parlance. Groman involved the merger of a target corporation into a newly formed subsidiary of the acquiring parent company. The stockholders of the target transferred their shares in it to the new subsidiary, receiving back cash and non-voting preferred stock in both parent and subsidiary. Target was liquidated, with the result that its assets ended up in the new subsidiary of the parent acquirer. The Court found that the parent corporation was not a "party to a reorganization" because it received nothing in the exchange. While the Court stated that a reorganization is not currently taxable where the stockholders of the target have a continuing interest in the assets of the target, it found that this did not exist in the case before it where the interest was indirect. The Court, raising form above substance, ignored the 100% ownership of the new subsidiary by its parent.
In Bashford, the facts were different enough that the taxpayers must have had high hopes of successfully distinguishing Groman. In...