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BEIJING BOSTON BRUSSELS CHICAGO DALLAS GENEVA HONG KONG HOUSTON LONDON LOS ANGELES NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C.

The University of Chicago Law School 67th Annual Tax Conference

Jeffrey T. Sheffield, Chair

William D. Alexander, Commenting

Suresh T. Advani, Presenting

Lawrence M. Garrett, Commenting

Busting Tax-Free Treatment

Topics to be addressed

2

I. Overview of Busting Transactions

II. IRS’s Ability to Recast Transaction into Tax-Free ProvisionA. Section 368

1. Generally2. Grandparent Stock3. Bankruptcy Reorganizations

B. Section 351C. Section 332

III. Nominal Consideration

IV. Economic Substance Doctrine

V. Conclusion

I. Overview of Busting Transactions

3

Subchapter C is designed to be non-elective but results are form driven

4

Treas. Reg. 1.368-1(b):

The purpose of the reorganization provisions of the Code is to except from the general rule certain specifically described exchanges incident to such readjustments of corporate structures made in one of the particular ways

specified in the Code . . .

From 2001 JCT Report on Simplification:

The different, and often overlapping, variations within the merger and acquisition rules can be viewed as a significant source of complexity. On the other hand, these rules, as they have been interpreted and clarified over the years through administrative pronouncements, provide a large amount of taxpayer selectivity and certainty. Taxpayers are relatively assured of obtaining a specific tax result so long as the transaction satisfies the formalistic requirements of the chosen merger and acquisition provision.

Example of formalism of Subchapter C

S(Shell)

T

T S/H

Merge

$90 A stock$10 Cash

Tax-Free (except for $10) Taxable

5

A

T

T S/H$90 A stock$10 Cash

AT Stock

Formalism of Subchapter C makes “busting” transactions possible

6

• A Busting Transaction is a transaction that would be described in a nonrecognition provision of the Code but for tax planning.

• Typically involves specific sequencing of steps or creation of additional entities or consideration designed to make the transaction fall outside of any nonrecognition provision.

Busting: Common tools

7

• Grandparent stock

• Section 368(c)

• Binding commitment test

• Crossing a statutory numerical line

• Changing direction of merger or transferring assets instead of merging

• Violating “solely” requirement

• Nonqualified preferred stock

• Keeping target alive so as not to liquidate

• LLCs/check-the-box rules

• Esmark v. Commissioner

Sample busting transaction: Busting Section 367 to permit loss recognition on inversion

8

T(Ireland)

T PublicA Public

A(U.S.)

New A(Ireland)

Contribute

Nominee Irish Law Firm

Common Non-Voting Preferred

S-1(Ireland)

S-2(Netherlands)

S-3(U.S.)

Merger Sub(U.S.)

Merge

• A is a U.S. publicly traded corporation with a market capitalization of approximately $20 billion.• T is an Irish corporation with a market capitalization of approximately $10 billion.• A and T agree to combine using a “double dummy” structure, whereby the A shareholders get stock in New A and the T shareholders get a combination of cash and stock in New A.• Prior to combination, New A issues $10,000 of non-voting preferred stock to an Irish law firm in exchange for services performed by the firm.

Sample busting transaction (contd.)

9

T Public

New A(Ireland)

A PublicIrish Law

Firm

Common (75%) Non-Voting Preferred

S-1(Ireland)

S-2(Netherlands)

S-3(U.S.)

A(U.S.)

• If transaction is viewed as a section 351 transaction or reorganization, shareholders of A and T will recognize gain, but not loss, under section 367(a). See Treas. Reg. § 1.367(a)-3(c).

• If transaction is viewed as a direct acquisition of the stock of A by S-3 for great grandparent stock, would not appear to fit within section 351 or reorganization provision.

• In order to fit transaction within Section 367(a),• transaction would need to be recast as an acquisition of the stock of A by New A, followed by a drop down the chain to S-3; and• in the case of the acquisition of T, the non-voting preferred would need to be ignored.

Common (25%)

T(Ireland)

II. IRS’s Ability to Recast Transaction into Tax-Free Provision

10

Potential recast tests available to IRS

11

1. IRS can not recast a transaction if recast involves same number of (or more) steps.

2. IRS can recast a transaction if path to end result could have been accomplished tax-free.

3. IRS can recast a transaction if historical precedent exists to do so.

4. IRS can recast a transaction if a strong policy consideration is at stake.

5. IRS can recast a transaction if it is between related parties.

Does Esmark preclude recasting into tax-free treatment?

12

• Esmark Inc. v. Commissioner, 90 T.C. 171 (1988) (declining to apply step-transaction doctrine when “recharacterization does not simply combine steps; it invents new ones”).

• Turner Broadcasting, Inc. v. Commissioner, 111 T.C. 315 (1998) (“In order to recharacterize the transaction, [the IRS] must have a logically plausible explanation that accounts for ALL the results of the transaction. The explanation may combine steps, but if it invents new ones, ‘Courts have refused to apply the step-transaction doctrine in this manner.’”).

• But neither Esmark nor Turner involved the IRS attempting to recast a taxable into a tax-free transaction.

• J.E. Seagram Corp. v. Commissioner, 104 T.C. 75 (1995) suggests that the test might be different in that context (“Esmark, Inc. did not involve a reorganization, so the facts of that case are not apposite.”).

Reorganization authorities inconsistent with Esmark

13

• Rev. Rul. 58-93

• Rev. Rul. 78-130

• Rev. Rul. 77-191

• Rev. Ruls. 67-274; 2001-46

Do these rulings stand for a broad proposition that reordering is permitted if

the end result is a tax-free reorganization, or are they historical anomalies?

Revenue Ruling 58-93

14

X

Z(Newco)

Y

Assets andliabilities

Z stock

Step 1

X

Individuals

Y

Z(Newco)

Merge

X stock

Surrender Y stock

Step 2

Individuals79%

21%

Revenue Ruling 58-93: Recast

15

Step 1

X

Y

Individuals

Merge

X stock

Surrender Y stock

Step 2

X

Individuals

Z (Newco)


Z stock

Rev. Rul. 77-191

16

Step 1

X

XS/Hs

Distribution of assets of business unit A

Partial redemption of X stock

Step 2

XS/Hs

X

Y(Newco)

Assets of business unit A

Y stock

Rev. Rul. 77-191: Recast

17

Step 1

X

Y(Newco)

Assets of business unit A

Y stock

Step 2

X

Y(Newco)

XS/Hs

Y stock Partial redemption of X stock


18

Step 1

P

S-2

S-1

X Y Z

Additional S-2 voting stock

S-1stock

N(Newco)

X ZY

N(Newco)

N voting stock All assets

S-2100%

N(Newco)

X

S-1

Y Z S-1

Step 2

Step 3


19

N(Newco)

S-2S-1

P

“Substantially all” assets

Partial voting stock of S-2

Recast:

S1Recast:

X, Y, Z

No recast necessary


20

Step 1

Y

X

XS/Hs

100% X stock

Y voting stock

Step 2

XS/Hs

Y

X

Surrender X stock Distribution

of assets in liquidation


21

YX

S/Hs

X

“Substantially all” of X’s assets

Y voting stock XS/Hs

Y

X Liquidated

Step 1 Step 2

Rev. Rul. 2001-46

22

Step 1

X

Y

70% X stock

Y stock

Step 2

X

Y

TS/Hs

T

T stock

Y assets (including 70% X stock)

Merger of Y and T

T stock Surrender Y stock

70% X stock, 30% cash

Surrender T stock

Rev. Rul. 2001-46 cont.

23

Step 3

T S/Hs

X

T

Merge T into X

Rev. Rul. 2001-46: Recast

24

T

X TS/Hs

T stock

70% X stock, 30% cash

Rulings on grandparent stock suggest a narrow reading of recast authorities

25

• Rev. Rul. 63-234

• Rev. Rul. 74-564

• Rev. Rul. 74-565

But could it be argued that, even without a recast, grandparent stock is now

permissible consideration based on the demise of the Groman and Bashford

remote continuity doctrine? (See Schultz, “Are Tax Free Mergers with

Grandparent Stock Now Possible?”)

Rev. Rul. 63-234

26

M

N

60%

XGroup

O

50%

50%

18%

Before

M

N

78% commonNew N votingpreferred

XGroup

O

100%

After

Transaction Form

1. N issues new voting preferred to X

for stock of O.

2. X contributes all its stock of N to M.

Recast

X contributed stock of O for M stock,

which violated continuity.

Is Section 368(a)(1)(G) more susceptible to recast?

27

$150 7-year T debt securities

T

• Assets with basis of $40, FMV of $60• NOL of $20

• If T Securityholders exchange their debt for 100% of equity of reorganized T:

• T will have COD of $90 ($150 liabilities minus $60 in value delivered to creditors).• This COD will not produce taxable income, but will have to be applied against T’s tax attributes as of beginning of next tax year.• Net result is that T will have no net operating losses and zero tax basis.

TSecurityholders

TSecurityholders

New TT

• If instead T Securityholders form New T and New T can acquire the assets of Old T in a taxable transaction:

•Old T will be able to offset the $20 gain with the NOL.•New T will have a stepped up basis of $60 (but no NOL).

Assets

Securities

Busting Section 368(a)(1)(G)

28

TSecurityholders

New TT

• Is sequencing sufficient to bust?

• Section 368(a)(1)(G) describes “a transfer by a corporation of all or part of its assets to another corporation in a title 11 or similar case; but only if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354, 355 or 356.”

• This language seems to contemplate a transfer of assets by T to New T in exchange for New T stock that is then distributed by T to securityholders (2 steps).

• Alternatively, the same end result could be achieved in the same number of steps by either (i) having securityholders contribute their securities to New T and then New T foreclosing on the T assets or (ii) the securityholders foreclosing on the assets of T and then contributing them to New T.

• But see PLR 201025018 (6/25/10) (recasting creditor formation of newco to find a reorganization under section 368(a)(1)(G)) (citing Alabama Asphaltic).

Assets

Securities


29

• Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179 (1942).

• Addressed fact pattern above, where form of transfer was ambiguous. Appeared to be foreclosure by creditors on assets followed by contribution to newco.

• Court did not think this mattered:

Some contention, however, is made that this transaction did not meet the statutory standard because the properties acquired by the new corporation belonged at the time to the committee and not to the old corporation. That is true. Yet the separate steps were integrated parts of a single scheme. Transitory phases of an arrangement frequently are disregarded under these sections of the revenue acts where they add nothing of substance to the completed affair.

• But does this really support reordering? Statute was quite different at the time. It applied to “(A) a merger or consolidation (including the acquisition by one corporation of . . . substantially all the properties of another corporation).” Arguably the Court was just disregarding the transitory ownership by the creditors to say that newco acquired substantially all of the assets of oldco.

• Is this reordering principle limited to G reorganizations?

• If a G reorganization is special, does IRS have enhanced ability to reorder in this setting?

• See following examples


30

TSecurityholders

S-2T

• Assume T securityholders form New T , which forms S-1, which forms S-2; S-2 effects the acquisition of assets of T.

• Can the IRS reorder to treat this as an acquisition of T’s assets by New T followed by a drop down the chain to S-2?

• Does there need to be a business purpose for S-1 and S-2?• Do S-1 and S-2 need to do anything other than hold stock?• When can S-1 and S-2 be liquidated?

• Different answer if T retains nominal asset (e.g., real estate) and does not liquidate?

• Different answer if S-1 issues non-voting preferred stock to management? Does it matter how much?

Assets

Securities

New T

S-1


31

• Assume T Securityholders organize New T as an LLC taxed as a partnership.

• Seems little doubt this achieves the goal of a taxable transaction.

• Why should this busting technique be acceptable, but use of multiple corporate tiers not be acceptable?

TSecurityholders

New T

T

Assets

Securities


32

• Assume instead some, but not all, T securityholders elect to hold their interest in New T partnership through a newly formed blocker corporation.

• Different answer?

• What if Blocker owns 99% of New T?

TSecurityholders

New T

T

Assets

Securities

Blocker

Section 351 recast authorities

33

• Rev. Rul. 70-140

• Rev. Rul. 84-44

• Rev. Rul. 84-111

• Rev. Rul. 2003-51

Is it meaningful that, unlike the reorganization context, there do not appear to

be any authorities recasting a transaction into section 351 treatment? Instead,

what recast authority exists recasts into taxable treatment.


34

Y

A(individual)

Agreement

X

Sole proprietorship assets

X stock

Y

Y stock

X stock

A

A(individual)

Y

X

Step 1 Step 2

Final

structure

Recast as acquisition

by Y of sole

proprietorship assets

followed by

contribution to X.


35

P

SX

YX

S/Hs

merger

P stock

P stock

Assets

Y

P

S

XS/Hs

<80%

Y + X S/Hs=>80%

X s/hs not counted as

part of transferor group.

Revenue Ruling 84-111, Situation 1

36

A B

X

R

R stockAll assets and liabilitiesof X

Step 1 Step 2

A B

X

R

Surrender interests in X

R stockR stock

Form respected

3737

A B

Y

Step 1 Step 2

A B

S

Surrender interests

in Y S stock






Form respected


3838

A B

Z

TT stock

Step 1 Step 2

A B

T

T stock

Interest in Z

Interest in Z

Form respected


39

W

Z

StockBusiness A assets

X

Y

W

Z

Cash (capital contribution to pre-existing subsidiary)

Z stock

Y stock

40% 60%

Cash and business A assets

Additional Y stock

Step 1 Step 2

Distinguished from Rev. Rul. 70-

140 on the grounds that

transaction could have been

accomplished tax-free without

Step 1.

Busting Section 351

40

PE Fund

TS Corp

Newco

T Shareholder

$90$90

• Assume T S Corp is worth $100; PE Fund wants to acquire T S Corp and make an election under section 338(h)(10).

• PE Fund forms Newco; Newco agrees to acquire 100% of the stock of T S Corp for $100.

• T Shareholder agrees to reinvest $10 of sales proceeds in Newco in exchange for 10% of Newco stock.

• On the closing date, PE Fund contributes $90 cash to Newco; Newco acquires 100% of the stock of T S Corp from T Shareholder for $90 cash contributed by PE Fund and simultaneous offset of T shareholder’s obligation to subscribe for Newco stock.

• Is taxpayer’s intent that this be taxable and form enough to bust section 351? (See

Stevens Pass v. Commissioner, 48 T.C. 1967; contrast Baker Commodities Inc. v.

Commissioner, 48 T.C. 374 (1967), aff’d 415F.2d 519 (9th Cir. 1969)); Gus Russell, Inc. v.

Commissioner, 36 T.C. 965 (1961).

$10

Busting Section 351

41

PE Fund

TS Corp

Newco

T Shareholder

$90

$90

• Assume same facts except Newco forms Midco to acquire T S Corp; purchase price is designated as $90 cash plus 10% of Newco stock.

• There are two ways T Shareholder could be deemed to receive Newco shares: (i) T Shareholder contributes 10% of T S Corp to Newco in exchange for Newco shares and Newco then contributes those shares to Midco (tax-free) or (ii) Midco acquired the Newco shares from Newco and then used the shares to acquire the T S Corp stock (taxable).

• If form is not clearly stated in purchase agreement, should default be tax-free or taxable?

• If purchase agreement specifies a form, does that control?• Is self-serving language “deeming” certain steps to occur sufficient or do actual steps need to be followed?• Does Midco need a business purpose?

Midco

$90

(Partially) Busting Section 351

42

PE Fund

T

Newco

Shareholder1

• Assume same facts except T is not an S corporation and has two shareholders; Shareholder 1 has a built-in gain in its shares; Shareholder 2 has a built-in loss.

• Can transaction be structured so that Shareholder 1 contributes its share directly to Newco (tax-free) and Shareholder 2 to Midco (taxable)?

Midco

Shareholder 2

Section 332 recast authorities

43

• Commissioner v. Day & Zimmermann, Inc., 151 F.2d 517 (3rd Cir. 1945).

• Granite Trust Co. v. United States, 238 F.2d 670 (1st Cir. 1956).

• Avco Mfg. Corp. v. Commissioner, 25 T.C. 975 (1956).

• FSA 201419011 (7/11/01).

• PLR 201330004 (7/26/13).

• PLR 201419011 (5/9/14).

PLR 201330004

44

P

S1

S2

S3

S4

S5

S6

Step 1

Cash contribution

Cash contribution

Cash

>20% S6 stock

Step 2

S6

S5 S3

Liquidating distribution under sec. 331

IRS ruled that

bust was

successful.

Rev. Proc. 2014-3

45

Added to the no-rule list, the treatment of transactions in which stock of a corporation is transferred with a plan or intention that the corporation be liquidated in a transaction intended to qualify under Section 331.

Is this addition driven by resource constraint issues or a changing view of the

efficacy of these transactions?

III. Nominal Consideration

46

Potential rules for testing nominal consideration available to IRS

47

1. Nominal consideration should be respected if it exists as a legal matter and is not transitory.

2. Nominal consideration should be respected only if it exceeds a specified percentage or numerical threshold (e.g., 1%/$500,000).

3. Nominal consideration should be respected only if its dollar value exceeds the fees and expenses of issuing it.

4. Nominal consideration should be ignored if a principal purpose of its issuance was tax planning.

5. Nominal consideration should be ignored if it was not separately bargained-for consideration.

Law seems to be #1, but most tax advisors adopt #2.

“Solely” Authorities

48

• Helvering v. Southwest Corp., 315 U.S. 194, 198 (1942) (“’Solely leaves no leeway.”).

• Mills v. Commissioner, 39 T.C. 393 (1962) (finding $27.36 in cash for fractional shares out of total deal value of $27,912.50 (less than one-tenth of one percent) sufficient to bust reorganization under section 368(a)(1)(B)), reversed 331 F.2d 321 (5th Cir. 1964) (reversing Tax Court on the grounds that cash was simply a mechanical rounding off; did not address de minimis argument).

• Rev. Rul. 66-365 (agreeing to follow appellate court decision in Mills as long as cash in lieu of fractional shares is not separately bargained-for consideration).

• Rev. Proc. 86-42 (ruling standard requiring representation that cash in lieu of fractional shares not separately bargained-for consideration and does not exceed one percent of the total consideration).

What is “separately bargained-for consideration”?

49

• Assume parties negotiate a term sheet for a pure stock-for-stock exchange that would qualify as a B reorganization. Acquirer’s tax lawyers review term sheet and decide to bust by issuing nominal cash to target shareholders. Target shareholders were not expecting cash but happily accept it.

• Does gratuitousness of cash mean it is not separately bargained-for?

• Alternatively, could cash be viewed as consideration for agreeing to bust transaction as opposed to part of exchange for stock?

Authorities ignoring de minimis amounts

50

• Section 332(a) requires “complete liquidation.”• But Treas. Reg. §1.332-2(c) permits the retention of a “nominal” amount of assets for the sole purpose of preserving the corporation’s legal existence.• Cf. Rev. Rul. 76-525 (refusing to apply section 332 if the corporation retains “any property, no matter how small in amount,” to continue carrying on business.

• Section 368(a)(1)(F) requires “a mere change in identity, form, or place of organization.”

• But Prop. Treas. Reg. §1.368-2(m) permits the resulting corporation to issue a nominal amount of stock or hold a nominal amount of assets to facilitate the transaction.• Example 3 of the Proposed Regulations suggests that 1% is nominal for these purposes.

Authorities ignoring de minimis amounts (contd.)

51

• Treas. Reg. §1.368-2(l)(2)(i) applies to transaction otherwise described in Section 368(a)(1)(D) if the same person or persons own stock in “identical

proportions.”• Regulatory exception made for de minimis variations in ownership.• Example suggests 1% is de minimis for these purposes.

• Rev. Proc. 95-10: Pre check-the-box ruling standard on entity classification required a partner to own at least a 1% interest in profits, losses and capital to be respected.

• Less than 1% permitted if entity had total contributions exceeding $50 million (i.e., $500,000 was considered “real” regardless of percentage it represented).

Do these authorities stand for a broad proposition that de minimis amounts

should be ignored or are they context-specific interpretations of statutory

intent?

Authorities respecting nominal shares

52

• Treas. Reg. §1.368-2(l)(2): Deems the issuance of a nominal share to satisfy the distribution requirement of Section 368(a)(1)(D)/354(b)(1)(B).

• PLR 8822062 (March 7, 1988): Finds the issuance of one share of non-voting preferred stock sufficient to disqualify merger under Section 368(a)(2)(E).

If a nominal share is sufficient to qualify a transaction under the reorganization

provisions, shouldn’t the same principle apply to disqualify a transaction?

If nominal shares should be ignored, how far would this principle extend?

53

S

• S has 999 shares of a single class of common stock outstanding. P owns 800 shares and wants to contribute property to S in a busted section 351 transaction. To accomplish this, P causes S to issue a single share of non-voting stock to an employee of S for services rendered.

• Assume share is disregarded because de minimis, and therefore transfer qualifies under section 351.

53

• If instead P simply transfers a single voting share to employee (bringing its ownership of voting power under 80%) before P contributes the property to S, should this too be ignored because employee’s ownership is too small?

P

800 out of 999 voting

common shares

Employee

1 newly issued non-voting share

S

P

799 out of 999 voting

common shares

Employee1 existing voting share

IV. Economic Substance

54

Code Section 7701(o)

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(1) In the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if

(A) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and

(B) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.

(2)(A) The potential for profit of a transaction shall be taken into account in determining whether the requirements of subparagraphs (A) and (B) of paragraph (1) are met with respect to the transaction only if the present value of the reasonably expected pre-tax profit from the transaction is substantial in relation to the present value of the expected net tax benefit that would be allowed if the transaction were respected.

LB&I Directive (LB&I-4-0711-015)

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• Mirrors legislative history, providing that it is likely not appropriate to raise the economic substance doctrine if the transaction being considered is related to, among other things, “[t]he choice to enter into a transaction or series of transactions that constitute a corporate organization or reorganization under subchapter C.”

• Also provides that the doctrine may be appropriate in transactions that include the following:

• Transaction is highly structured• Transaction creates no meaningful economic change on a present value basis (pre-tax)• Transaction accelerates a loss or duplicates a deduction• Transaction has no credible business purpose apart from federal tax benefits

• An examiner still must obtain approval to apply the doctrine to a transaction containing these features if the transaction is subject to a detailed statutory or regulatory scheme and complies with this scheme.

One key issue is definition of the “transaction”

57

• Notice 2014-58: [W]hen a series of steps includes a tax-motivated step that is not necessary to achieve a non-tax objective, an aggregation approach may not be appropriate. In that case, the “transaction” may include only the tax-motivated steps that are not necessary to accomplish the non-tax goals—adisaggregation approach.

• See also Coltec Industries, Inc. v. U.S., 454 F.3d 1340 (CA Fed. Cir. 2006) (“the transaction to be analyzed is the one that gave rise to the alleged tax benefit”).

Can Coltec be distinguished from the typical busting step on the grounds that

in Coltec the tax motivated step was arguably the whole point of the

transaction?

Should the economic substance doctrine ever be relevant to a busting transaction?

58

• Overall transaction is an undisputed realization event.

• Indeed, almost always stronger case for realization than facts of Cottage Savings.

• Hard to distinguish from transactions that are unassailable under the economic substance doctrine (See example on slide 5).

• Transactional electivity a long-recognized feature of subchapter C.

V. Conclusion

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Taxpayers should continue to have relatively free rein to bust

60

• Historically, busting transactions have been viewed as an appropriate method of tax planning by both Congress and the IRS.

• Congress has been well aware of the transactional electivity of subchapter C. Its failure to adopt a pure elective regime could be attributed to a view that the current system, with all its quirks, is a well-developed body of law that works.

• Concerns about loss triggering have usually been addressed through separate regimes (e.g., Code Section 267) rather than forcing taxpayers into tax-free treatment.

• With a few narrow exceptions, the IRS has a long history of respecting the formality of subchapter C in this context.

No strong policy reason to challenge typical busting transaction

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• An expansive view of recast authority, the de minimis rules, or the application of the economic substance doctrine in this area would only increase uncertainty and deal friction.

• Even under the most expansive view of the IRS’s authority to force a transaction into tax-free treatment, the overall structure of subchapter C leaves open vast ability to bust. No clear reason to single out transactions at the edges if no broader policy is being served.• Clear lines avoid the potential for the IRS getting whipsawed.• Challenge of busting transactions could also establish bad precedent in cases where the IRS wants to challenge a transaction that purports to qualify under a tax-free provision.

• Busting transactions take place in the context of a clear realization event. Sections 368, 351 and 332 are best viewed as specific exceptions to the general rule of gain or loss recognition.

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