The New Pre-Reorganization Continuity Of Interest Regulations.

Extract

---

The New Pre-Reorganization Continuity Of Interest Regulations.

Originally published October, 2003

I. INTRODUCTION

On August 30, 2000, the Department of the Treasury ("Treasury") and the Internal Revenue Service ("Service" or "IRS") issued final regulations under section 368 providing guidance on the application of the continuity of interest ("COI") requirement to pre-reorganization transactions.1 These regulations supplement final, temporary, and proposed COI regulations issued in January 1998.2 However, the new final pre-reorganization COI regulations are substantially different from the temporary and proposed pre-reorganization COI regulations issued in 1998. This article discusses the COI requirement in general, reviews the 1998 temporary and proposed pre-reorganization COI regulations and the new final pre-reorganization COI regulations, and analyzes when the new final pre-reorganization regulations should apply to count pre-reorganization distributions and redemptions against the COI requirement.

In summary, the new final pre-reorganization regulations apply the section 356 "boot" rule in determining whether a distribution or redemption prior to a reorganization counts against the COI requirement. Thus, one must determine when section 356 applies to distributions and redemptions prior to reorganizations.

This article concludes that the Service should apply a "source of funds" test in determining the application of the section 356 boot rule. Although this source of funds test does not always yield a clear answer, there is little need for the Service to adopt a more restrictive test for the following reasons:

Cases under the COI requirement allow target s...

See the full content of this document

---