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Bankruptcy and Insolvency Taxation, 4th Edition by Robert Liquerman, Grant W. Newton

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§ 5.8 INSOLVENCY REORGANIZATIONS

(a) Insolvency Reorganization other than G Reorganizations

(i) Introduction

A discussion of the fundamental case law and government pronouncements addressing insolvency reorganizations is important for two reasons. First, insolvency reorganizations may occur outside of a bankruptcy or similar case and thus not be subject to the G reorganization provisions. Second, this discussion also provides a helpful background to the G reorganization rules.264

(ii) Seminal Cases: Alabama Asphaltic and Southwest Consolidated

The seminal case in the area of insolvency reorganizations is Helvering v. Alabama Asphaltic Limestone Co.265 In Alabama Asphaltic, a bankrupt corporation (Oldco) merged into a corporation (Newco) that was formed by Oldco’s creditors. Pursuant to the plan, the Newco stock was issued to the creditors of Oldco and the historical shares of Oldco were canceled. The question at issue was whether the transaction qualified as a tax-free merger under a predecessor provision to I.R.C. section 368(a)(1)(A) and whether Oldco’s historical high basis in its assets carried over to Newco. The decision of whether the transaction qualified as a tax-free merger would depend on whether the COI requirement was satisfied. The IRS did not believe continuity was satisfied because the shareholders of Oldco did not receive stock (a continuing equity interest) in Newco.

The Supreme Court disagreed, stating:

[I]t is immaterial that the transfer shifted the ownership ...

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