122 T.C. No. 19

UNITED STATES TAX COURT

DOVER CORPORATION AND SUBSIDIARIES, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12821-00. Filed May 5, 2004.

D and H, United Kingdom corporations, were

controlled foreign corporations with respect to P. H

was a wholly owned subsidiary of D. In 1997, D sold

the stock of H to an unrelated third party. In 1999, P

requested that H be granted an extension of time to

retroactively elect to be treated as a “disregarded

entity” pursuant to sec. 301.7701-3, Proced. & Admin.

Regs., effective “immediately prior to” D’s sale of the

H stock. R granted the requested extension of time on

Mar. 31, 2000. H’s retroactive disregarded entity

election was filed on or about Oct. 10, 1999. Pursuant

to that election, there was, for Federal tax purposes,

a deemed sec. 332, I.R.C., liquidation of H followed

immediately by D’s deemed sale of H’s assets, rather

than a sale by D of the H stock.

Held: In light of R’s administrative guidance

pertaining to the tax effects of a liquidation governed

by secs. 332 and 381, I.R.C., D’s deemed sale of H’s

assets constitutes a sale of property used in D’s trade

or business within the meaning of sec. 1.954-
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2(e)(3)(ii) through (iv), Income Tax Regs., with the

result that D’s gain on that sale does not constitute

Subpart F (foreign personal holding company) income to

P pursuant to sec. 954(c)(1)(B)(iii), I.R.C. 

Rauenhorst v. Commissioner, 119 T.C. 157 (2002),

applied.

Robert D. Whoriskey, George Pompetzki, Eduardo A.

Cukier, and Linda Galler, for petitioner.

Lyle B. Press, for respondent.

OPINION

HALPERN, Judge: Dover Corporation (petitioner) is the

common parent of an affiliated group of corporations making a

consolidated return of income (the group or affiliated group). 

By notice of deficiency dated September 14, 2000 (the notice),

respondent determined deficiencies in Federal income tax for the

group for its 1996 and 1997 taxable (calendar) years in the

amounts of $9,329,596 and $24,422,581, respectively. All but one

of the adjustments that gave rise to those determinations have

been settled, and this report addresses the sole remaining issue,

which involves an interaction between the so-called check-the-box

regulations and the definition of foreign personal holding

company income (FPHCI); viz, whether the deemed sale of assets

immediately following their deemed receipt (pursuant to the

check-the-box regulations) from a disregarded foreign entity

gives rise to FPHCI.
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Unless otherwise stated, all section references are to the

Internal Revenue Code in effect for 1997, the year at issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

Background

Introduction

This case was submitted for decision without trial pursuant

to Rule 122. Facts stipulated by the parties are so found. The

stipulation of facts filed by the parties, with attached

exhibits, is included herein by this reference. Respondent

objects, on the grounds of relevance, to 26 exhibits referenced

in certain of the stipulations. See the discussion infra section

IV.

Petitioner is a Delaware corporation, whose shares are

publicly traded and which maintains its principal place of

business in New York, New York. 

Business Activities of the Affiliated Group

Together, the affiliated group is a diversified industrial

manufacturer, producing through its members and foreign

subsidiaries a broad range of products and sophisticated

manufacturing equipment for other industries and businesses. 

During and prior to 1997, the group’s business activities were

divided into five business groups, one of which was known as

Dover Elevator. 
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Dover Elevator

Dover Elevator, like each of the other business groups, was

managed by a headquarters corporation, Dover Elevator

International, Inc. (DEI), a domestic corporation. However, not

all of the corporations that constituted Dover Elevator were

direct or indirect subsidiaries of DEI. During 1997, DEI’s

United Kingdom (UK) elevator business was conducted by Hammond &

Champness Limited (H&C), a UK corporation engaged in the business

of installing and servicing elevators. H&C was wholly owned by a

UK holding company, Dover U.K. Holdings Limited (Dover UK), which

was wholly owned by a Delaware corporation, Delaware Capital

Formation (DCF), which, finally, was wholly owned by petitioner. 

Sale of H&C

On June 30, 1997, Dover UK and petitioner entered into an

agreement with Thyssen Industrie Holdings U.K. PLC (Thyssen), a

German corporation registered in England and Wales, and its

German parent, Thyssen Industrie AG, for the sale by Dover UK to

Thyssen of the entire issued share capital of H&C (the agreement

or stock sale agreement). The agreement provided that it and

other specified documents and agreements relating to the sale

were to be held in escrow until the “Escrow Release Date” (July

11, 1997), by which time it was anticipated that the purchaser

would have “completed its due diligence inquiries, and * * *

determined that it does wish to proceed with * * * [the sale]”
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1 DEI sold its German elevator service subsidiaries to

Thyssen effective June 1, 1997, and members of the affiliated

group sold the remainder of the group’s elevator business, within

and without the United States, to Thyssen Industrie AG and

Thyssen Elevator Holding Corp. in January 1999. Thus, in a

series of three transactions, the Thyssen group purchased the

group’s worldwide elevator business. 

(the “escrow condition”). Dover UK, as “Vendor”, also agreed to

accomplish certain document deliveries and undertakings by July

11, at which time Thyssen, as “Purchaser”, was required to

“satisfy the consideration for the Shares”. Dover UK also agreed

to carry on the H&C business “in the normal course without any

interruption” between June 30 and July 11, 1997. On July 11,

1997, Thyssen notified Dover UK that the escrow condition had

been satisfied, and (we assume, since there is no stipulation)

the purchase price was received by Dover.1

Petitioner obtained an opinion of UK counsel dated July 3,

2001, that, as a matter of English law, beneficial title to the

H&C shares passed from Dover UK to Thyssen on July 11, 1997, when

the escrow condition was satisfied. 

Retroactive Election To Treat H&C as a Disregarded Entity

By letter dated December 3, 1998, petitioner, on behalf of

its (then) former indirect subsidiary, H&C, requested that 

respondent grant an extension of time, pursuant to sections

301.9100-1(c) and 301.9100-3, Proced. & Admin. Regs., for H&C to

file a retroactive election to be a disregarded entity for

Federal tax purposes (the request for 9100 relief). 
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2 Pursuant to sec. 301.7701-3(c)(1)(iii), Proced. & Admin.

Regs., H&C could have made the election to be a disregarded

entity at any time within 75 days after the date (June 30, 1997),

specified on the election form (Form 8832, Entity Classification

Election). Because petitioner inadvertently missed that

deadline, it was required to request an extension of time,

pursuant to secs. 301.9100-1(c) and 301.9100-3, Proced. & Admin.

Regs., to make the election.

Specifically, petitioner requested: “H&C be granted an extension

of time to make an election: (a) * * * to be disregarded as an

entity separate from its owner for U.S. tax purposes and (b)

effective immediately prior to the sale of stock in H&C by Dover

UK to Thyssen UK.”2 In the request for 9100 relief, petitioner

stated that the date of the sale was June 30, 1997, and, on the

Form 8832, Entity Classification Election (Form 8832), attached

to the request for 9100 relief, it set forth June 30, 1997, as

the proposed effective date of the election. 

Initially, respondent was reluctant to grant the request for

9100 relief, in large part, because, in respondent’s view,

petitioner should not be entitled to benefits it might claim

resulted from the disregarded entity election; i.e., the

avoidance of FPHCI on the deemed sale of the H&C assets. 

However, after representatives of petitioner and respondent

conferred, and petitioner made a supplemental submission,

respondent, on March 31, 2000, granted the requested relief. 

Specifically, respondent granted to H&C “an extension of time for

making the election to be disregarded as an entity separate from
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3 Based upon petitioner’s representation, that is the

assumed date of the sale of the H&C stock by Dover UK.

4 There has, however, been much commentary concerning the

issue before us today. E.g., Sheppard, “Behind the Eight Ball on

Check-the-Box Abuses”, 101 Tax Notes 437 (Oct. 27, 2003); Yoder &

Everson, “Check-and-Sell Transactions: Proposed Regulations

(continued...)

its owner for federal tax purposes, effective immediately prior

to the sale on * * * [June 30, 19973], until 60 days following

the date of this letter.” Respondent, however, added the

following caveat:

no inference should be drawn from this letter that any

gain from the sale of * * * [H&C’s] assets immediately

following its election to be disregarded as an entity

separate from its owner gives rise to gain that is not

foreign personal holding company income as defined in

section 954(c)(1)(B) of the Internal Revenue Code. 

On or about October 10, 1999, H&C made an election on Form

8832 to be disregarded as a separate entity. The Form 8832

specifies that the election is to be effective beginning June 30,

1997. 

Discussion

I. Introduction

This case presents an issue of first impression and, insofar

as we are aware, the first occasion that any court has had to

opine on the impact of the so-called check-the-box regulations on

the application of a specific provision of the Internal Revenue

Code of 1986 (the Code), in this case, section 954(c)(1)(B)(iii)

(defining, in part, FPHCI).4
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4(...continued)

Withdrawn, But Still Under Attack”, 32 Tax Mgmt. Int. J. 515

(Oct. 10, 2003); Click, “Treasury Withdraws Extraordinary Checkthe-Box Regulations”, 101 Tax Notes 95 (Oct. 6, 2003). 

5 The parties do not dispute that petitioner constituted a

“United States shareholder”, as defined in sec. 951(b), with

respect to Dover UK on the date of the sale of the H&C stock.

II. Code and Regulations

A. The Code

The provision of the Code principally at issue is section

954. Section 954 is found in subpart F of part III, subchapter

N, chapter 1, subtitle A of the Code (Subpart F), which

encompasses sections 951-964. Subpart F is concerned with

controlled foreign corporations (CFCs). Neither party disputes

that, in 1997, both Dover UK and H&C (up until it became a

disregarded entity) were CFCs, as that term is defined in section

957(a). Section 951 provides that each United States shareholder

of a CFC shall include in gross income certain amounts, including

“his pro rata share * * * of the * * * [CFC’s] subpart F income”

for the taxable year. Sec. 951(a)(1)(A)(i).5 Subpart F income

includes “foreign base company income (as determined under

section 954)”. Sec. 952(a)(2). Pursuant to section 954(a)(1),

foreign base company income includes FPHCI, which is defined, in

pertinent part, in section 954(c) as follows:

(c) Foreign Personal Holding Company Income.--

(1) In general.--For purposes of subsection (a)(1), the

term “foreign personal holding company income” means the
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portion of the gross income which consists of:

* * * * * * *

(B) Certain property transactions.--The

excess of gains over losses from the sale or

exchange of property--

 * * * * * * *

(iii) which does not give rise to any income.

B. The Regulations

1. Regulations Under Section 954(c)(1)(B)(iii)

In pertinent part, section 1.954-2(e)(3), Income Tax Regs.,

which defines “property that does not give rise to income”,

provides:

(3) Property that does not give rise to income. 

Except as otherwise provided in this paragraph (e)(3),

for purposes of this section, the term property that

does not give rise to income includes all rights and

interests in property (whether or not a capital asset)

including, for example, forwards, futures and options. 

Property that does not give rise to income shall not

include--

* * * * * * *

(ii) Tangible property (other than real

property) used or held for use in the

controlled foreign corporation’s trade or

business that is of a character that would be

subject to the allowance for depreciation

under section 167 or 168 and the regulations

under those sections (including tangible

property described in section 1.167(a)-2);

(iii) Real property that does not give

rise to rental or similar income, to the

extent used or held for use in the controlled

foreign corporation’s trade or business;
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(iv) Intangible property (as defined in

section 936(h)(3)(B)), goodwill or going

concern value, to the extent used or held for

use in the controlled foreign corporation’s

trade or business[.]

In pertinent part, section 1.954-2(a)(3), Income Tax Regs.,

provides: “The use * * * for which property is held is that use *

* * for which it was held for more than one-half of the period

during which the controlled foreign corporation held the property

prior to the disposition.”

2. The Check-the-Box Regulations

a. Development and Issuance of the Regulations

The Commissioner announced, in Notice 95-14, 1995-1 C.B.

297, that the Internal Revenue Service (IRS) and the Department

of the Treasury (Treasury) were considering simplifying the

entity classification regulations to allow taxpayers to treat

both domestic (unincorporated) and foreign business organizations

as partnerships or associations (generally taxable as

corporations) on an elective basis. In Notice 95-14, the

Commissioner justified the proposed radical departure from the

existing classification regulations by observing that, as a

“consequence of the narrowing of the differences under local law

between corporations and partnerships * * * taxpayers can achieve

partnership tax classification for a non-publicly traded

organization that, in all meaningful respects, is virtually

indistinguishable from a corporation.” Id. The Commissioner 
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further observed that the proliferation of revenue rulings,

revenue procedures, and letter rulings determining or relating to

the classification for Federal tax purposes of limited liability

companies and partnerships formed under State law had made the

existing classification regulations unnecessarily cumbersome to

administer, and the resulting complexities risked leaving small

unincorporated organizations with insufficient resources and

expertise to apply the current classification regulation to

achieve the organization’s desired classification. Id. The

Commissioner also stated that, because the same types of concerns

“are mirrored in the foreign context,” the IRS and Treasury “are

considering simplifying the classification rules for foreign

organizations”. Id. at 298. Notice 95-14 invited comments and

scheduled a public hearing. Id. at 299.

In 1996, the written comments and public hearing were

followed by the issuance of, first, proposed and, then, final

classification regulations. See PS-43-95, Proposed Income Tax

Regs., 61 Fed. Reg. 21989 (May 13, 1996) (the proposed

regulations); T.D. 8697 (December 18, 1996), 1997-1 C.B. 215 (the

final regulations). The classification regulations are commonly

referred to as the “check-the-box” regulations because of their

elective feature. See, e.g., Schler, “Initial Thoughts on the

Proposed ‘Check-the-Box’ Regulations”, 71 Tax Notes 1679 (June

17, 1996).
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6 The final regulations provide a list of organizations

(substantially the same as those listed in the proposed

regulations) formed under foreign (or U.S. possession) law that,

subject to certain grandfather rules, are treated as per se

corporations. See sec. 301.7701-2(b)(8), (d), Proced. & Admin.

Regs. In general, the list includes the publicly traded, limited

liability organization that may be formed under the law of each

country or possession. The per se corporation under United

Kingdom law is a public limited company. H&C was not such a

company.

7 The check-the-box regulations, like the classification

regulations that they replaced, were issued under sec. 7701(a)(2)

and (3), which defines the terms “partnership” and “corporation”. 

Some commentators have questioned whether the regulations

constitute a valid exercise of the Treasury Secretary’s 

authority under sec. 7805(a) to issue interpretive regulations. 

See, e.g., Staff of Joint Committee on Taxation, Review of

Selected Entity Classification and Partnership Tax Issues, at 

13-17 (J. Comm. Print Apr. 18, 1997); McKee et al., Federal

Taxation of Partnerships and Partners, par. 3.08 at 3-102 (3d ed.

1997); Dougan et al., “Check The Box”--Looking Under The Lid, 75

(continued...)

Not only did both sets of regulations permit most domestic

(unincorporated) and foreign business organizations to elect

between association and partnership classification for Federal

tax purposes, as first proposed in Notice 95-14,6 but, of

particular relevance to this case, they both extended the

elective regime to single-owner organizations. Under the final

regulations, single-owner organizations are permitted to elect

“to be recognized or disregarded as entities separate from their

owners.” Sec. 301.7701-1(a)(4), Proced. & Admin. Regs.

The final regulations became effective as of January 1,

1997, with a special transition rule for existing entities. T.D.

8697, 1997-1 C.B. at 219.7
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7(...continued)

Tax Notes 1141, 1143-1144 (May 26, 1997); Mundstock, A Unified

Approach To Subchapters K & S, 11 n.35 (2002). Neither party has

challenged the validity of all or any portion of the regulations. 

Therefore, for purposes of this case, we accept (without

deciding) that the regulations are valid.

The preamble to the final regulations contains the following

warning to taxpayers:

in light of the increased flexibility under an elective

regime for the creation of organizations classified as

partnerships, Treasury and the IRS will continue to

monitor carefully the uses of partnerships in the

international context and will take appropriate action

when partnerships are used to achieve results that are

inconsistent with the policies and rules of particular

Code provisions or of U.S. tax treaties. [T.D. 8697,

1997-1 C.B. at 216.]

The preamble to the proposed regulations contains a substantially

identical warning, except that the promise is to “issue

appropriate substantive guidance” rather than “take appropriate

action” with regard to the use of partnerships for what Treasury

and IRS consider improper purposes in the international context. 

See 61 Fed. Reg. at 21990 (May 13, 1996). We surmise that the

change in language signaled an intent not only to address

perceived abuses in the use of partnerships in amended

regulations, revenue rulings, or other public pronouncements

that, generally, would have prospective effect but also to

challenge those perceived abuses on audit. For no apparent

reason, the warning did not extend to allegedly inappropriate

uses of disregarded entities, the type of organization involved

in this case.
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b. Amendments to the Regulations

Since they were issued, the (final) check-the-box

regulations have been amended several times. The only relevant 

amendments were additions to the regulations that, together,

constitute the existing paragraph (g) of section 301.7701-3,

Proced. & Admin. Regs. See T.D. 8844, 1999-2 C.B. 661, 666-667; 

T.D. 8970, 2002-1 C.B. 281, 282. Although those amendments are

generally effective as of the dates of issuance (November 29,

1999, and December 17, 2001, respectively), both amendments

provide for retroactive application for elections filed before

those dates if all affected persons take consistent filing

positions. See sec. 301.7701-3(g)(2)(ii), (4), Proced. & Admin.

Regs. The parties have stipulated that the election by H&C, on

Form 8832, to be a disregarded entity was filed on or about

October 10, 1999, which precedes the general effective dates. 

On brief, both parties have cited and relied upon portions of

section 301.7701-3(g), Proced. & Admin. Regs. Therefore, we find

that the parties agree to the retroactive application of

paragraph (g) of section 301.7701-3, Proced. & Admin. Regs., to

H&C’s disregarded entity election.

c. Applicable Provisions of the Regulations

Section 301.7701-3(a), Proced. & Admin. Regs., sets forth

the general rule that “[a] business entity that is not classified
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as a corporation * * * can elect its classification for federal

tax purposes as provided in this section”. 

In pertinent part, section 301.7701-3(g)(1)(iii), Proced. &

Admin. Regs., provides:

(iii) Association to disregarded entity. If an

eligible entity classified as an association elects * *

* to be disregarded as an entity separate from its

owner, the following is deemed to occur: The

association distributes all of its assets and

liabilities to its single owner in liquidation of the

association.

Section 301.7701-2(a), Proced. & Admin. Regs., states that,

“if * * * [an] entity is disregarded, its activities are treated

in the same manner as a sole proprietorship, branch, or division

of the owner”.

Under section 301.7701-3(c)(1)(i), Proced. & Admin. Regs., a

classification election, including an election to change

classification, is made by filing a Form 8832 with the IRS

service center designated on that form. Under subdivision (iii),

the election is effective “on the date specified by the entity on

Form 8832" if, as in this case, one is specified.

Under section 301.7701-3(g)(3)(i), Proced. & Admin. Regs.,

an election to change classification “is treated as occurring at

the start of the day for which the election is effective”, and

“[a]ny transactions that are deemed to occur * * * as a result of

a change in classification [e.g., in the case of a change in

classification from association to disregarded entity, the deemed

liquidation] are treated as occurring immediately before the
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close of the day before the election is effective”. For example,

if H&C’s disregarded entity election is effective as of the start

of business on June 30, 1997, the deemed liquidation of H&C is

treated as occurring immediately before the close of business on

June 29, 1997.

The making of a disregarded entity election “is considered

to be the adoption of a plan of liquidation immediately before

the deemed liquidation”, thereby qualifying the parties to the

deemed liquidation for tax-free treatment under sections 332 and

337. Sec. 301.7701-3(g)(2)(ii), Proced. & Admin. Regs.

Lastly, section 301.7701-3(g)(2)(i), Proced. & Admin. Regs.,

provides:

(2) Effect of elective changes.--(i) In general. 

The tax treatment of a change in the classification of

an entity for federal tax purposes by election under

paragraph (c)(1)(i) of this section is determined under

all relevant provisions of the Internal Revenue Code

and general principles of tax law, including the step

transaction doctrine.

The preamble to the 1997 proposed regulations, which contains the

identical provision, explains the purpose of the above quoted

provision:

This provision * * * is intended to ensure that the tax

consequences of an elective change will be identical to

the consequences that would have occurred if the

taxpayer had actually taken the steps described in the

* * * regulations. [REG-105162-97, 62 Fed. Reg. 55768

(Oct. 28, 1997).]
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8 We find the parties to be in agreement that, whatever our

decision regarding the issue of whether Dover UK’s deemed sale of

the H&C operating assets constituted a sale of “property which

does not give rise to any income”, that decision applies to all

of H&C’s assets as of the date of the deemed asset sale to

Thyssen.

III. Summary of the Parties’ Arguments

A. Petitioner’s Argument

Petitioner argues that, by permitting a corporate taxpayer

to “disregard” the separate entity status of a subsidiary and,

instead, treat the subsidiary’s business as a hypothetical branch

or division of the parent, the check-the-box regulations override

the principle, based upon Moline Props., Inc. v. Commissioner,

319 U.S. 436, 438-439 (1943), that the separate entity status of

a corporation may not be ignored for Federal tax purposes. As a

result (as petitioner sees it), Dover UK is deemed not only to

sell H&C’s assets (rather than its shares in H&C) but is deemed

to be engaged in H&C’s business at the time of that sale. 

Therefore, petitioner argues that the H&C assets are excluded, by

section 1.954-2(e)(3)(ii) through (iv), Income Tax Regs., from

the definition of property “which does not give rise to any

income”, with the result that the deemed sale of those assets did

not give rise to FPHCI pursuant to section 954(c)(1)(B)(iii).8

Alternatively, petitioner argues that, giving effect to the

“plain and ordinary meaning” of section 954(c)(1)(B)(iii), Dover

UK’s deemed sale of the operating assets of H&C “could not
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possibly have been a sale of property ‘which does not give rise

to any income’ because those assets were components of an active,

ongoing commercial enterprise, which did give rise to income.” 

Therefore, petitioner argues that, because the requirement in

section 1.954-2(e)(3)(ii) through (iv), Income Tax Regs., that

such assets be used in the seller’s trade or business goes beyond

the narrow statutory mandate that such assets simply not be

property “which does not give rise to any income”, that

regulation is invalid. 

B. Respondent’s Arguments

Respondent argues that the deemed sale of the H&C operating

assets was not a sale of property used or held for use in Dover

UK’s business. Therefore, respondent continues, that property

was not excluded from the definition of property “which does not

give rise to any income” pursuant to section 1.954-2(e)(3)(ii)

through (iv), Income Tax Regs., and its deemed sale by Dover UK

gave rise to FPHCI taxable to petitioner. Secs. 951(a)(1)(A)(i),

952(a)(2), 954(a)(1), (c)(1)(B)(iii). 

Based primarily on the statutory language and legislative

history of section 954(c)(1)(B), respondent also rejects

petitioner’s argument that section 1.954-2(e)(3)(ii) through

(iv), Income Tax Regs., is invalid. 
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IV. Motion and Evidentiary Objection

A. Petitioner’s Motion To Strike

1. Introduction

On July 14, 2003, after the parties’ submission of briefs, 

pursuant to Rule 52, petitioner moved to strike respondent’s

argument that, as a matter of law, the doctrine of duty of

consistency mandates a finding that Dover UK’s sale of H&C stock

to Thyssen was completed as of June 30, 1997, not July 11, as

urged by petitioner. 

2. Duty of Consistency Argument

In its motion, petitioner denies that it is attempting to

“change or recharacterize the facts [regarding the date of the

sale of the H&C stock] in this fully stipulated case” or that it

has “acted in a deceitful or misleading way” as implied by

respondent. Rather, petitioner states that (1) the issue as to

whether the stock sale agreement provided for a June 30 or July

11 sale of the H&C stock presents an issue of law and (2) its

prior representation that the date of sale was June 30, 1997,

constituted “a clear cut mistake of law * * * not a

misrepresentation of fact”. Petitioner also argues that

respondent was not surprised by petitioner’s argument because, on

December 12, 2001, more than a year before it filed its opening

brief, on March 5, 2003, petitioner apprised respondent of its

new position regarding the date of sale. That notification
- 20 -

consisted of a letter to respondent’s counsel enclosing a copy of

an opinion of U.K. counsel that, under English law, July 11,

1997, was the actual date on which the sale of the H&C stock was

completed. 

Respondent objects to petitioner’s motion on the ground that

(1) respondent’s position is nothing more than a legitimate legal

argument and (2) petitioner has not shown that respondent’s

arguments are “redundant, immaterial, impertinent, frivolous, or

scandalous matter” within the meaning of Rule 52. 

In essence, petitioner’s motion raises the issue of whether

we should strike respondent’s attack on petitioner’s argument

that the sale of the H&C stock occurred on July 11, 1997, the

date referred to in the stock sale agreement as the “escrow

release date”, rather than on June 30, 1997, the date of that

agreement and the date represented by petitioner to be the date

of sale in the request for 9100 relief. In framing that issue,

the parties have assumed that, were we to find that the stock

sale occurred on July 11, 1997, rather than on June 30, 1997,

there necessarily would be an 11-day period between the deemed

liquidation of H&C into Dover UK and Dover UK’s deemed sale of

the H&C operating assets, during which period Dover UK must be

deemed to have operated the H&C business as its own. Under those

circumstances, petitioner’s assertion that Dover UK’s deemed sale

of the H&C operating assets constituted a sale of property used
- 21 -

in its (Dover UK’s) business is arguably more persuasive than it

would be if the assets are deemed to have been sold immediately

after the deemed liquidation of H&C.

The underlying assumption by both parties is that, whether

the sale of the H&C stock (and, therefore, the deemed sale of 

H&C’s assets) occurred on June 30 or July 11, 1997, the deemed

liquidation of H&C is considered to have occurred immediately

before the close of business on June 29, 1997, the day before the

effective date of H&C’s disregarded entity election, as specified

in the Form 8832 filed by H&C. See sec. 301.7701-3(c)(1)(iii),

(g)(3)(i), Proced. & Admin. Regs. We question that underlying

assumption. In its initial request for 9100 relief, petitioner

specifically requested that “H&C be granted an extension of time

to make * * * [a disregarded entity election] effective

immediately prior to the sale of stock in H&C by Dover UK to

Thyssen UK”. (Emphasis added.) Consistent with petitioner’s

request, respondent granted to H&C, “an [60-day] extension of

time for making [a disregarded entity] election * * * effective

immediately prior to the sale [of H&C stock] on [June 30, 1997]”. 

(Emphasis added.) Both petitioner, in filing the Form 8832

listing June 30, 1997, as the effective date of the disregarded

entity election, and respondent, in accepting that filing,

believed that June 30, 1997, was the date of the H&C stock sale

and that the deemed liquidation occurred “immediately prior to”
- 22 -

that sale. Therefore, although it is not addressed by the

parties, we believe that the parties’ mutual understanding that

the deemed liquidation of H&C was to be “effective immediately

prior to” the sale of the H&C stock raises an issue as to whether

that deemed liquidation should be treated as occurring (1)

“immediately prior to” the sale, whether that sale occurred on

June 30 or July 11, 1997, or (2) regardless of the actual date of

sale, immediately before the close of business on June 29, 1997,

the day before the effective date of the disregarded entity

election, as specified in the Form 8832 filed by H&C. We find it

unnecessary to resolve that issue, however, because, as discussed

infra section V.C., our decision does not depend upon the length

of time between the deemed liquidation of H&C and the actual sale

of its stock (i.e., deemed sale of its assets). 

Because resolution of the date-of-sale issue is unnecessary

to our decision in this case, the issue as to whether

respondent’s duty of consistency argument should be stricken is

essentially moot.

3. Conclusion

Petitioner’s motion to strike will be denied.

B. Respondent’s Objection to Stipulated Exhibits

The exhibits to which respondent objects on the grounds of

relevance were all executed in connection with the sale of the

H&C stock to Thyssen. They were introduced by petitioner in
- 23 -

order to show the multiplicity of steps taken and documents

executed between June 30 and July 11, 1997, in order to complete

the sale in accordance with the terms of the June 30, 1997,

agreement. As stated supra section IV.A.2., our decision in this

case does not depend upon the actual date of the H&C stock sale. 

As a result, respondent’s evidentiary objection, like

petitioner’s motion to strike respondent’s duty-of-consistency

argument, is essentially moot. Therefore, we shall overrule

respondent’s objection.

V. Status of the H&C Assets as Assets Used in Dover UK’s

 Business: Application of Section 1.954-2(e)(3), Income Tax

 Regs.

A. Introduction

Petitioner argues that Dover UK’s deemed sale of the H&C

assets qualifies as a sale of property used in Dover UK’s trade

or business. Therefore, pursuant to section 1.954-2(e)(3)(ii)

through (iv), Income Tax Regs., that property is not, within the

meaning of section 954(c)(1)(B)(iii), property “which does not

give rise to any income”, and Dover UK’s sale does not give rise

to FPHCI taxable to petitioner. In support of its argument,

petitioner relies upon the check-the-box regulations and revenue

rulings previously issued by respondent. Respondent disagrees on

the basis of caselaw, which he cites in support of his argument

that Dover UK’s deemed sale of the H&C operating assets did not

constitute a sale of assets “used or held for use” in Dover UK’s
- 24 -

business within the meaning of section 1.954-2(e)(3)(ii) through

(iv), Income Tax Regs. 

B. The Relevant Authorities

1. Section 301.7701-2(a), Proced. & Admin. Regs.

Petitioner argues that “the check-the-box regulations * * *

impose continuity of business enterprise as a consequence of * *

* [a disregarded entity] election”, citing section 301.7701-2(a),

Proced. & Admin. Regs. In pertinent part, that regulation

provides: “If * * * [a business entity with only one owner] is

disregarded, its activities are treated in the same manner as a

sole proprietorship, branch or division of the owner.”

Petitioner argues: “As a consequence [of the above-quoted

regulation], there was as a matter of law and under respondent’s

own check-the-box regulations * * * a continuing business use of

H&C’s assets, which were deemed to be a branch or division of

Dover UK.” 

2. The Revenue Rulings

Petitioner also argues that respondent’s position in this

case is “wholly inconsistent with” his position contained in

published revenue rulings, which, under principles derived from

the attribute carryover rules of section 381(c) applicable to

section 332 liquidations, “unequivocally attribute the trade or

business of a subsidiary that is liquidated under section 332 to

its parent.” Therefore, because H&C’s disregarded entity
- 25 -

9 At the time of the issuance of the revenue rulings cited

by petitioner, secs. 331 and 336 governed the tax consequences to

the shareholders and distributing corporation, respectively, of a

partial (or complete) liquidation of the corporation, and sec.

346(a) defined the term “partial liquidation”. Sec. 222 of the

Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L.

97-248, 96 Stat. 478, amended (1) sec. 346 to eliminate the

definition of “partial liquidation” contained therein and (2)

secs. 331 and 336 to omit the reference in each to a partial

liquidation. Sec. 222 of TEFRA also amended (1) sec. 302(e) so

that, essentially, it embodies the former sec. 346(a) definition

of a partial liquidation, and (2) sec. 302(b)(4), so that it

treats a redemption of stock from a non-corporate shareholder in

connection with a partial liquidation of the distributing

corporation as a distribution in part or full payment in exchange

for the stock under sec. 302(a).

election involved a deemed section 332 liquidation of H&C, see

sec. 301.7701-3(g)(1)(iii) and (2)(ii), Proced. & Admin. Regs.,

petitioner concludes that respondent’s position violates the

principle of Rauenhorst v. Commissioner, 119 T.C. 157, 182-183

(2002), that “taxpayers should be entitled to rely on revenue

rulings in structuring their transactions, and they should not be

faced with the daunting prospect of the Commissioner’s disavowing

his rulings in subsequent litigation”. 

The revenue rulings cited by petitioner involve the question

of whether the liquidation of a subsidiary followed by a pro rata

distribution of the proceeds of the sale of the subsidiary’s

assets to the parent’s shareholders in partial redemption of the

parent’s stock may qualify as a partial liquidation of the parent

under former section 346(a)(2).9

The seminal ruling upon which petitioner relies is Rev. Rul.
- 26 -

75-223, 1975-2 C.B. 109. That ruling describes three situations

in which a parent corporation (P) disposes of a wholly owned

operating subsidiary (S). In situation 1, P liquidates S in a

tax-free section 332 liquidation and sells the S assets for cash. 

P distributes the cash to P’s shareholders in redemption of a

portion of their P stock. Situation 2 is the same as situation 1

except that S sells its own assets for cash prior to the section

332 liquidation and subsequent redemption distribution by P. In

situation 3, P simply distributes the S stock pro rata to its

shareholders in redemption of a portion of their P stock. The

issue, as stated in the ruling, is “whether, and to what extent,

the fact that a corporation has conducted a portion of its

business activities through a subsidiary rather than directly

precludes the application of section 346(a)(2) of the Code.”

1975-1 C.B. at 110. Under former section 346, a distribution in

partial redemption of the stock of a corporation is considered to

be made in partial liquidation of the corporation if the

distribution is on account of “the [distributing] corporation’s

ceasing to conduct, or consists of the assets of, a trade or

business * * * [actively conducted throughout the prior 5-year 

period and] not acquired by the corporation within such period in

a [taxable] transaction”. Former sec. 346(a) and (b)(1). See

also sec. 1.346-1(a)(2), Income Tax Regs., stating: “An example

of a distribution which will qualify as a partial liquidation
- 27 -

under * * * section 346(a) is a distribution resulting from a

genuine contraction of the corporate business”.

The revenue ruling, after noting that “[t]he business

activities of a subsidiary are not generally considered to be

business activities of its parent corporation”, recognizes that,

under a section 332 liquidation (where the carryover basis rules

of section 334(b)(1) apply), “[s]ection 381, in effect integrates

the past business results of the subsidiary (as represented by

its earnings and profits, net operating loss carryover, etc.)

with those of the parent corporation.” Rev. Rul. 75-223, 1975-1

C.B. at 110. The revenue ruling then states:

For most practical purposes, the parent corporation,

after the liquidation of the subsidiary, is viewed as

if it has always operated the business of the

liquidated subsidiary. Consequently, there is no

meaningful distinction, for purposes of section

346(a)(2), between a corporation that distributes the

assets of a division, or the proceeds of a sale of

those assets, and a parent corporation that distributes

assets of a subsidiary, or the proceeds of a sale of

such assets, received from the subsidiary in a

liquidation governed by sections 332 and 381. [Id.]

Accordingly, the ruling holds that, in situations 1 and 2, “the

fact that the distributions * * * were attributable to assets

that were used by a subsidiary rather than directly by the parent

will not prevent the distribution from qualifying as a ‘genuine

contraction of the corporate business’ of the parent within the
- 28 -

10 The ruling contrasts the partial redemption distribution

in situation 3 and treats it as a corporate separation governed

by sec. 355 rather than as a corporate contraction qualifying as

a partial liquidation within the meaning of sec. 346(a)(2). Rev.

Rul. 75-223, 1975-1 C.B. 109, 110. Unlike situations 1 and 2,

situation 3 does not involve a sec. 332 liquidation entailing a

carryover of tax attributes under sec. 381. See also Rev. Rul.

79-184, 1979-1 C.B. 143, involving a parent’s sale of the stock

of its wholly owned subsidiary followed by a distribution (pro

rata) of the sales proceeds to the shareholders of the parent in

partial redemption of their stock. Analogizing the facts of that

ruling to the facts of situation 3 of Rev. Rul. 75-223, Rev. Rul.

79-184, 1979-1 C.B. at 144 holds that “the overall transaction

has the economic significance of the sale of an investment and

distribution of the proceeds” and “does not qualify as a

distribution in partial liquidation within the meaning of section

346(a)(2).”

11 Although under Treasury regulations G.C.M.s do not

establish precedent (see sec. 1.6661-3(b)(2), Income Tax Regs.),

they have been described as “an expression of agency policy”. 

Taxation With Representation Fund v. IRS, 646 F.2d 666, 682 (D.C.

Cir. 1981). Moreover, the Court of Appeals for the Second

Circuit (the court to which an appeal of this decision most

likely would lie) has stated that, under certain circumstances,

it may be proper to rely on G.C.M.s for “interpretive guidance”. 

Morganbesser v. United States, 984 F.2d 560, 564 (2d Cir. 1993).

meaning of section 1.346-1(a)(2) of the regulations.” Id.10

In Chief Counsel Memorandum (G.C.M.) 37,054 (Mar. 21,

1977),11 the IRS Chief Counsel described the position taken in

Rev. Rul. 75-223 and in G.C.M. 35,246 (Feb. 20, 1973), in which

the Chief Counsel gave advance approval to the position taken in

Rev. Rul. 75-223, as follows:

Under that Ruling [Rev. Rul. 75-223] and G.C.M. 35246 a

distribution by a parent corporation of the assets of a

subsidiary (or the proceeds of a sale of such assets)

received in a liquidation governed by Code sections 332

and 381 is to be treated no differently than a

distribution by a corporation of the assets of a branch

or division (or the proceeds of a sale of such assets).
- 29 -

12 Private letter rulings may be cited to show the practice

of the Commissioner. See Rowan Cos. v. United States, 452 U.S.

247, 261 n.17 (1981); Hanover Bank v. Commissioner, 369 U.S. 672,

686-687 (1962); Rauenhorst v. Commissioner, 119 T.C. 157, 170 n.8

(2002); Estate of Cristofani v. Commissioner, 97 T.C. 74, 84 n.5

(1991); Woods Inv. Co. v. Commissioner, 85 T.C. 274, 281 n.15

(1985).

Respondent reaffirmed his Rev. Rul. 75-223 position in Rev.

Rul. 77-376, 1977-2 C.B. 107. He also reaffirmed that position

in subsequent private letter rulings.12 See, e.g., Priv. Ltr.

Rul. 2003-01-029 (Jan. 3, 2003), Priv. Ltr. Rul. 2000-04-029

(Jan. 28, 2000), and Priv. Ltr. Rul. 87-04-063 (Oct. 29, 1986),

applying the principles of Rev. Rul. 75-223 in finding partial

liquidation distributions under section 302(b)(4) and (e)(2).

Respondent has also reaffirmed his Rev. Rul. 75-223 position

in the context of transactions other than partial liquidations. 

See, e.g., Priv. Ltr. Rul. 80-19-058 (Feb. 13, 1980), involving

an amalgamation of a United States shareholder’s Country X CFCs,

which qualified as a “corporate acquisition” within the meaning

of section 381. Pursuant to the amalgamation, CFC F1 contributed

the stock of its subsidiary, F2, to a new CFC, Newco 1, in

exchange for Newco 1 stock and debentures, the latter

consideration constituting a dividend to F1 under section

356(a)(2). Newco 1 combined with several operating company CFCs,

three of which were same country (Country X) subsidiaries of F1,

to form Newco II. In the private letter ruling, the Commissioner
- 30 -

states that “a surviving corporation carries with it all those

characteristics which the merged corporation had prior to the

merger * * * [including] the attribute of a predecessor

corporation having engaged in a trade or business with respect to

the use of its assets”, even though that is not an item

specifically listed in section 381(c) as carrying over to the

surviving corporation. Accordingly, the IRS ruled that the

amounts treated as section 356(a)(2) dividends paid to F1 out of

the earnings and profits of a party to the Newco II amalgamation

which were accumulated when that party (1) was a related person

to F1 within the meaning of section 954(d)(3), (2) had been

created or organized under the same foreign country laws as F1,

and (3) had a “substantial part” of the assets used in its trade

or business located in such foreign country would not be

includable in FPHCI of F1 for purposes of section 954, by reason

of section 954(c)(4)(A) (now section 954(c)(3)(A)(i)), the socalled same country exception to the treatment, as FPHCI, of

related party dividends or interest. In other words, the IRS

found that Newco II inherited from former operating subsidiaries

of F1 collapsed into it in a transaction subject to section 381

the attribute of being “engaged in a trade or business with

respect to the use of * * * [those subsidiaries’] assets”. 

Therefore, a portion of the Newco II dividend to F1 arising out

of F1's receipt of the Newco I debentures (which become Newco II
- 31 -

debentures) was excluded from FPHCI by the same country

exception.

3. The Caselaw

Respondent relies principally upon four cases in support of

his argument that the H&C assets were not used in Dover UK’s

business before their deemed sale by Dover UK: Reese v.

Commissioner, 615 F.2d 226 (5th Cir. 1980), affg. T.C. Memo.

1976-275; Azar Nut Co. v. Commissioner, 94 T.C. 455 (1990), affd.

931 F.2d 314 (5th Cir. 1991); Acro Manufacturing Co. v.

Commissioner, 39 T.C. 377 (1962), affd. 334 F.2d 40 (6th Cir.

1964); and Ouderkirk v. Commissioner, T.C. Memo. 1977-120. In

three of those cases (Reese, Azar Nut, and Ouderkirk) the issue

is whether an individual’s gain or loss on the sale of a parcel

of real property is capital or ordinary.

a. Reese v. Commissioner

In Reese, the taxpayer financed the construction of a

manufacturing plant, which he intended to sell to investors who

would agree to lease the building to a corporation for use in the

corporation’s manufacturing business. The taxpayer was the chief

officer and principal shareholder of the corporation. The

partially completed plant was sold at a loss to satisfy a

judgment against the taxpayer. The issue was whether the loss

was capital or ordinary. The taxpayer argued for ordinary loss

treatment on the ground that the plant was either (1) held

primarily for sale to customers in the ordinary course of his
- 32 -

construction business or (2) used in a trade or business,

excludable, in either case, from capital asset status under what,

respectively, are now paragraphs (1) and (2) of section 1221(a). 

The Court of Appeals for the Fifth Circuit found that (1) the

taxpayer’s activities in financing and acting as builder,

developer, and general contractor for the construction of the

plant between 1968 and 1970, when the building was sold,

constituted “an isolated, non-recurring venture”, which did not

constitute a trade or business, and (2) the property sold was

intended for use by the corporation in its manufacturing

business, not by the taxpayer in his business of being a

corporate executive. Reese v. Commissioner, 615 F.2d at 231. 

Therefore, the Court of Appeals held that the property was not

excluded from the definition of a capital asset as either

property held for sale to customers in the ordinary course of

business or as property used in the taxpayer’s trade or business. 

Id.

In support of his argument that Dover UK’s deemed holding of

the H&C operating assets “for only a moment before the sale” did

not transform those assets into assets used in Dover UK’s

business, respondent relies on the conclusion of the Court of

Appeals in Reese that an “isolated, non-recurring venture” cannot

amount to the conduct of a trade or business. The facts before

the Court of Appeals, and the question it answered, however, are
- 33 -

13 The position of the Court of Appeals for the Fifth

Circuit in Reese v. Commissioner, 615 F.2d 226 (5th Cir. 1980),

affg. T.C. Memo. 1976-275, that a single nonrecurring venture

ordinarily will not be considered a trade or business, has been

referred to as the “one-bite” rule, a rule that has been

specifically rejected by this Court. See Cottle v. Commissioner,

89 T.C. 467, 488 (1987); Morley v. Commissioner, 87 T.C. 1206,

1211 (1986); S&H, Inc. v. Commissioner, 78 T.C. 234, 244 (1982).

distinguishable from the facts and question before us. In Reese,

the Court of Appeals was asked to conclude (and did conclude)

that the taxpayer’s venture into real property construction never

amounted to the conduct of a trade or business. Here, on the

deemed liquidation of H&C, Dover UK is deemed to have received

the assets of what undeniably was an ongoing business. The

question is whether that business was ever conducted by Dover UK. 

Reese does not answer that question.13

b. Ouderkirk v. Commissioner and Azar Nut Co.

 v. Commissioner

Ouderkirk v. Commissioner, T.C. Memo. 1977-120, involved an

individual who, in connection with the liquidation of a

corporation, received 7,700 acres of cut-over timberland and an

obsolete and inefficient sawmill, both of which the taxpayer

contributed to a partnership owned by him and his wife. After

refurbishment, the sawmill was placed in operation. Over an 11-

year period, approximately 80 percent of the timber processed by

the sawmill was acquired from sources outside the 7,700 acres of

timberland owned by the partnership. At the end of that period,

the partnership sold the sawmill at a loss (which it reported,
- 34 -

and passed through to the taxpayer and his wife, as an ordinary

loss from the sale of property used in a trade or business) and

sold the timberland at a gain (which it reported, and passed

through to the taxpayer and his wife, as a capital gain from the

sale of an investment asset). The Commissioner challenged the

characterization of the timberland gain as capital gain, arguing

that the timberland was not a capital asset because it was

property used in the partnership’s sawmill and lumber business. 

We rejected the Commissioner’s position and sustained the

taxpayer’s argument that the property was investment property in

the hands of the partnership. In reaching that conclusion, we

noted that “[t]he incidental use of this 7,700-acre tract in

connection with * * * [the] cutting of scattered timber did not

convert the tract from investment property to real property used

in the [partnership’s] sawmill business within the meaning of

section 1231.” Id.

In Ouderkirk, as in Reese v. Commissioner, supra, the issue

was whether the property in question had a business connection

sufficient to require its exclusion from the definition of a

capital asset (in Ouderkirk, as property used in a trade or

business, and, in Reese, as inventory type property). Therefore,

Ouderkirk, like Reese, is distinguishable from this case, where

the issue is whether assets undeniably used in a trade or

business were used in a trade or business conducted by Dover UK.
- 35 -

14 The taxpayer in Azar Nut Co. v. Commissioner, 94 T.C.

455 (1990), affd. 931 F.2d 314 (5th Cir. 1991), argued that the

house was not a capital asset because its purchase from the

terminated employee and subsequent resale were connected with the

taxpayer’s business; i.e., the transactions arose out of a

business necessity, not an investment purpose. We rejected that

argument on the basis of Ark. Best Corp. v. Commissioner, 485

U.S. 212 (1988). That case rejected the business connectionbusiness motivation rationale of such cases as Commissioner v.

Bagley & Sewall Co., 221 F.2d 944 (2d Cir. 1955)(relied upon by

the taxpayer in Azar Nut), affg. 20 T.C. 983 (1953), and held

that property constitutes a capital asset unless it is excluded

from capital asset status by one of the specific statutory

exclusions listed in what is now sec. 1221(a). Ark. Best Corp.

v. Commissioner, supra at 223.

In Azar Nut Co. v. Commissioner, 94 T.C. 455 (1990), the

taxpayer, in connection with its termination of an individual’s

employment, purchased the employee’s residence at an appraised

fair market value pursuant to the terms of an employment

agreement. The taxpayer immediately listed the house for sale at

the purchase price paid to its former employee but eventually

incurred a substantial loss on the sale, some 22 months later. 

Because the house was never held for rental by the taxpayer or

used or intended for use in the taxpayer’s business, we held that

it was not exempt from capital asset status as property used in a

trade or business and that the loss was, therefore, capital

loss.14 Id. at 463-464. In Azar Nut, as in Ouderkirk v.

Commissioner, supra, and Reese v. Commissioner, supra, capital

asset status was based upon insufficient (or no) business use,

not, as respondent argues in this case, upon the identity of the

user of assets undeniably used in a trade or business.
- 36 -

c. Acro Manufacturing Co. v. Commissioner

In Acro Manufacturing Co. v. Commissioner, 39 T.C. 377

(1962), the taxpayer, a manufacturer of precision switches and

thermostatic controls, acquired in a tax-free reorganization the

stock of Universal Button Company (Button), a manufacturer of

metal buttons for work clothes. Some 3 months later, the

taxpayer received an offer to buy all of the stock or assets of

Button. Because the taxpayer wished to avoid capital loss on a

sale of the Button stock, the parties to the transaction

negotiated an agreement for the sale of Button’s assets whereby

the taxpayer would liquidate Button and sell its assets to the

purchaser. Pursuant to that agreement, Button adopted a plan of

complete liquidation. On the following day, less than 7 months

after its acquisition by the taxpayer, Button underwent a taxfree section 332 liquidation, and its assets were sold by the

taxpayer to the purchaser for cash plus the purchaser’s

assumption of the liabilities relating to the business formerly

carried on by Button. Button’s business continued uninterrupted

during the foregoing ownership transfers.

The taxpayer argued that the non-capital asset character of

the assets in Button’s hands should carry over to the taxpayer

after the section 332 liquidation because, under the section

1223(2) holding period “tacking” provisions, the taxpayer is
- 37 -

deemed to have held or owned those assets while they were used by

Button in the conduct of its business. Acro Manufacturing Co. v.

Commissioner, supra at 383. Respondent, while admitting that the

assets distributed to the taxpayer in connection with the section

332 liquidation of Button were not capital assets in Button’s

hands, argued that, because the former Button assets were never

used in the taxpayer’s business, they constituted capital assets

in the taxpayer’s hands. Id. at 384.

We rejected the taxpayer’s arguments and held that the

character of the Button assets did not automatically carry over

to the taxpayer; rather, we stated that our concern was with the

“tax nature” of those assets in the taxpayer’s hands. We asked:

“Were the assets acquired or used in connection with a business

of * * * [the taxpayer]?” Id. We found that the taxpayer

“neither acquired nor used the Button assets in its business,

neither did * * * [the taxpayer] enter into the button business.” 

Id. at 386. In connection with those findings, we rejected the

taxpayer’s argument that it used the former button assets in its

business “for a short time”, between the same-day liquidation of

Button and sale of its assets, stating that “ownership for such a

minimal, transitory period is insufficient to establish ‘use’ of

the distributed assets in * * * [the taxpayer’s] business or to

place * * * [the taxpayer] in the button business.” Id. at 384. 

As a result, we found that the former Button assets were capital
- 38 -

15 Respondent points out that Dover UK failed to report any

income from H&C’s business on its 1997 return filed with the

United Kingdom Inland Revenue. While we deem that fact

irrelevant, we note that Dover UK’s United Kingdom tax reporting

position is justified by the fact that H&C’s disregarded entity

election resulted in a deemed liquidation of H&C effective for

United States, but not United Kingdom, tax purposes.

assets in the taxpayer’s hands and the taxpayer’s sale of those

assets resulted in a capital loss. Id. at 386.

Both the result in Acro Manufacturing Co. v. Commissioner,

supra, and our reasoning in reaching that result were affirmed by

the Court of Appeals for the Sixth Circuit. Acro Manufacturing

Co. v. Commissioner, 334 F.2d 40 (6th Cir. 1964). In affirming

our decision that the taxpayer’s “minimal, transitory” period of

actual ownership of assets whose character was non-capital in

Button’s hands was insufficient to establish their character as

non-capital assets in the taxpayer’s hands, the Court of Appeals

observed that it was “not advised of any showing by the

taxpayer’s corporate records” that the taxpayer did, in fact,

operate the button business for any period of time. Id. at 44.15

While the facts of Acro Manufacturing Co. v. Commissioner,

39 T.C. 377 (1962), involve an actual, rather than a deemed,

section 332 liquidation, we do not believe that that is a

consequential difference. Because the period between the deemed

distribution in liquidation of H&C’s assets and the deemed sale

of those assets can be described as a “minimal, transitory
- 39 -

period”, we conclude that the facts before us are, as pertinent,

not distinguishable from the facts in Acro Manufacturing Co.

C. Analysis and Application of Authorities

Respondent specifically acknowledges that, for tax purposes,

H&C’s disregarded entity election constituted a deemed section

332 liquidation of H&C into Dover UK, whereby H&C became a branch

or division of Dover UK. Respondent refers to the disregarded

entity election as a “check-the-box liquidation” and states that

there is no difference between it and an actual section 332

liquidation. 

Accordingly, the principal question before us is whether,

attendant to a section 332 liquidation, the transferee parent

corporation succeeds to the business history of its liquidated

subsidiary with the result that the subsidiary’s assets used in

its trade or business constitute assets used in the parent’s

trade or business upon receipt of those assets by the parent.

Because Dover UK’s disregarded entity election is

characterized as an actual liquidation of H&C for income tax

purposes, among the undisputed tax consequences are the

following: (1) Dover UK recognized neither gain nor loss on its

deemed receipt of H&C’s assets, see sec. 332(a); (2) it succeeded

to H&C’s basis in those assets, see sec. 334(b); and (3) it would

add H&C’s holding period to its own (deemed) holding period in

those assets, see sec. 1223(2). Moreover, the deemed-received

assets did not constitute a single, mass asset with a unitary
- 40 -

holding period, but comprised the numerous classes of both

tangible and intangible property necessary to constitute a going

elevator installation and service business (e.g., tools, spare

parts, fixtures, and accounts receivable). Each item deemed

received by Dover UK came with a distinct, carryover basis and an

existing holding period. Cf. Williams v. McGowan, 152 F.2d 570,

572 (2d Cir. 1945) (capital asset status of the assets of a

business sold shortly after the partnership conducting the

business was terminated must be determined on an asset by asset

basis).

Agreeing, as he must, to the foregoing description of the

tax consequences resulting to Dover UK from its deemed receipt of

H&C’s assets, respondent, nevertheless, argues: “Dover UK must *

* * use, or hold for use, such assets for the requisite period of

time in its trade or business before Dover UK is allowed to

exclude from FPHCI the gain from the [deemed] sale of those

assets.” Respondent refuses to attribute H&C’s business history

to Dover UK:

Dover UK had a separate identity from H&C and the

business of H&C (installing and servicing elevators)

was not the business of Dover UK (a holding company). 

In addition, Dover UK never intended to use the assets

in an elevator business. It acquired the assets for

the purpose of selling those assets and avoiding FPHCI. 

The arguments of the parties concerning whether we must deem

Dover UK to have succeeded to H&C’s business history center on

section 381, which provides that the acquiring corporation in a
- 41 -

16 Among the tax attributes of the transferor subsidiary

that carry over to the transferee parent, pursuant to sec.

381(c), are net operating loss and capital loss carryovers,

earnings and profits, and the subsidiary’s overall method of

accounting, method of computing inventories, and method of

computing the allowance for depreciation.

section 332 liquidation succeeds to the various tax attributes of

the distributing corporation described in section 381(c).16

While section 381(c) does not list among the carryover attributes

the distributing corporation’s business history, we agree with

petitioner that respondent’s denial that Dover UK succeeded to

H&C’s business history is inconsistent with his position in Rev.

Rul. 75-223, 1975-1 C.B. 109, Rev. Rul. 77-376, 1977-2 C.B. 107,

G.C.M. 37,054 (Mar. 21, 1977), and a number of private letter

rulings (discussed supra section V.B.). Respondent argues that

the conclusion reached in Rev. Rul. 75-223 (and reaffirmed in

subsequent published and private rulings) should be limited to

section 346. Respondent further states that “petitioner should

not be allowed to argue that the tax attributes of a subsidiary

are carried over to the parent in all cases under * * * [section

381].” We disagree.

The crucial finding in all of the rulings discussed supra

section V.B., is that, in any corporate amalgamation involving

the attribute carryover rules of section 381, the surviving or

recipient corporation is viewed as if it had always conducted the

business of the formerly separate corporation(s) whose assets are
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acquired by the surviving corporation. See, e.g., Rev. Rul. 75-

223, 1975-1 C.B. at 110. The Chief Counsel has stated

unequivocally that the impact of that finding on a distribution

by a corporation of assets received by it in a section 332

liquidation is that the distribution “is to be treated no

differently than a distribution by a corporation of the assets of

a branch or division”. G.C.M. 37,054 (Mar. 21, 1977). Although

that principle has been applied by the Commissioner in specific

contexts (generally, in connection with former section 346 or

section 302(e) partial liquidations), it has been stated as a

principle of law applicable in any case involving a corporate

combination to which section 381 applies. That includes a

section 332 liquidation. Moreover, if a parent corporation’s

distribution to its shareholders of the operating assets of a

former subsidiary, immediately after receiving those assets in a

section 332 liquidation of the subsidiary, qualifies as “a

genuine contraction of the * * * [parent corporation’s] business”

for purposes of section 1.346-1(a)(2), Income Tax Regs., we fail

to see any basis for not applying the same rationale to the

parent’s sale of the liquidated subsidiary’s assets, so that the

sale is treated as a sale of assets used in the parent

corporation’s business for purposes of section 1.954-2(e)(3)(ii)

through (iv), Income Tax Regs.
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17 We need not revisit our decision in that case at this

time.

In Rauenhorst v. Commissioner, 119 T.C. 157 (2002), we

refused “to allow * * * [IRS] counsel to argue the legal

principles of * * * opinions against the principles and public

guidance articulated in the Commissioner’s currently outstanding

revenue rulings.” Id. at 170-171. Consistent with our holding

in Rauenhorst, we refuse to allow respondent to argue the legal

principles of Acro Manufacturing Co. v. Commissioner, 39 T.C. 377

(1962), against the principles subsequently articulated in Rev.

Rul. 75-223, 1975-2 C.B. 109, Rev. Rul. 77-376, 1977-2 C.B. 107,

and G.C.M. 37,054 (Mar. 21, 1977). We therefore consider

respondent to have conceded that, as a direct result of a section

332 liquidation of an operating subsidiary, the surviving parent

corporation is considered as having been engaged in the

liquidated subsidiary’s preliquidation trade or business, with

the result that the assets of that trade or business are deemed

assets used in the surviving parent’s trade or business at the

time of receipt. See Rauenhorst v. Commissioner, supra at 170-

171, 173. As stated by respondent on brief, pursuant to section

301.7701-3(g)(1)(ii) and (2)(i), Proced. & Admin. Regs., “there

is no difference between a check-the-box liquidation and an

actual liquidation.” Therefore, notwithstanding our holding in

Acro Manufacturing Co. v. Commissioner, supra,

17 we conclude that
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18 Because H&C’s use of its assets was entirely business

related, that use almost certainly covered more than one-half of

the various periods that, taking into account sec. 1223(2), Dover

UK is deemed to have held those assets. Therefore, that use is

deemed to be the use for which those assets were held for

purposes of sec. 1.954-2(a)(3), Income Tax Regs.

respondent has conceded that Dover UK’s deemed sale of the H&C

assets immediately after the check-the-box liquidation of H&C

constituted a sale of property used in Dover UK’s business within

the meaning of section 1.954-2(e)(3)(ii) through (iv), Income Tax

Regs.18 That result is consistent with the conclusion of the

Court of Appeals for the Second Circuit in Williams v. McGowan,

152 F.2d 570 (2d Cir. 1945), that depreciable property and

inventory that had been part of a business sold shortly after the

partnership conducting the business was terminated retain their

status as non-capital assets in the hands of the individual

seller.

Respondent’s acknowledgment that the business history and

activities of a subsidiary carry over to its parent in connection

with a section 332 liquidation of the subsidiary is also

reflected in section 301.7701-2(a), Proced. & Admin. Regs., which

provides that “if the entity is disregarded, its activities are

treated in the same manner as a sole proprietorship, branch, or

division of the owner”. In the context of a business

organization, a “branch” is defined as a “division of a

business”, and a “division” as an “area of * * * corporate
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19 Sec. 301.7701-2(a), Proced. & Admin. Regs., does not

specify a minimum period of time after which a disregarded entity

election results in branch or division status for the disregarded

entity. Rather, the disregarded entity is deemed a branch or

division of the owner upon the effective date of the election, a

point that is conceded by respondent on brief. Nor do the checkthe-box regulations require that the taxpayer have a business

purpose for such an election or, indeed, for any election under

those regulations. Such elections are specifically authorized

“for federal tax purposes”. Sec. 301.7701-3(a), Proced. & Admin.

Regs. 

activity organized as an administrative or functional unit.”

American Heritage Dictionary (4th ed. 2000); see also Black’s Law

Dictionary 188, 479 (6th ed. 1990) (defining a “branch”, in

relevant part, as a “[d]ivision, office, or other unit of

business located at a different location from main office or

headquarters”, and a “division” as an “[o]perating or

administrative unit of * * * business”). Thus, the plainly

understood import of the cited regulation’s use of the terms

“branch” and “division” to describe the impact of the deemed

section 332 liquidation resulting from a disregarded entity

election with respect to an operating subsidiary (particularly in

light of respondent’s ruling position, as set forth supra) is

that the activities of the business operation indirectly owned by

the parent through its former subsidiary become the activities of

a functional or operating business unit directly owned and

conducted by the parent.19 It follows from the language of the

regulation that the assets used in the business of the (deemed)

liquidated subsidiary retain their status as assets used in the
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20 Because of Rev. Rul. 75-223, 1975-2 C.B. 109, and its

progeny, petitioner’s interpretation of sec. 301.7701-2(a),

Proced. & Admin. Regs., as requiring the post-(deemed)

liquidation business activities of H&C to be considered business

activities of Dover UK immediately following the deemed

liquidation of H&C is certainly a plausible interpretation of

that regulation. As we stated in Corn Belt Hatcheries of Ark.,

Inc. v. Commissioner, 52 T.C. 636, 639 (1969), in sustaining the

taxpayer’s plausible interpretation of an ambiguous ruling,

“[t]axpayers are already burdened with an incredibly long and

complicated tax law. We see no reason to add to this burden by

requiring them anticipatorily to interpret ambiguities in

respondent’s rulings to conform to his subsequent

clarifications”.

same business by the (deemed) branch or division of the parent.

We interpret our statement in Acro Manufacturing Co. v.

Commissioner, 39 T.C. at 386, that the taxpayer “neither acquired

nor used the Button assets in its business” as tantamount to a

statement that the Button business never became an operating

branch or division of the taxpayer. Therefore, the Secretary and

the Commissioner, in effect, rejected our position in that case

by issuing section 301.7701-2(a), Proced. & Admin. Regs., as well

as Rev. Rul. 75-223, Rev. Rul. 77-376, and G.C.M. 37,054.20

Finally, we note that, consistent with his admonition in the

preamble to the final check-the-box regulations, T.D. 8697, 1997-

1 C.B. at 216, that “Treasury and the IRS will continue to

monitor carefully the uses of partnerships [and, by extension,

disregarded entities] in the international context and will take

appropriate action when * * * [such entities] are used to achieve

results that are inconsistent with the policies and rules of
- 47 -

21 Respondent did include an allegedly corrective amendment

as part of proposed regulations issued on Nov. 29, 1999. See

REG-110385-99, 64 Fed. Reg. 66591 (Nov. 29, 1999). The proposed

regulations contained a special rule for foreign disregarded

entities used in a so-called extraordinary transaction, one of

which constitutes the sale of a 10-percent or greater interest in

such an entity within 12 months of the entity’s change in

classification from association taxable as a corporation to

disregarded entity. Under those circumstances, the proposed

regulations provided that the disregarded entity “will instead be

(continued...)

particular Code provisions”, respondent was, of course, free to

amend his regulations to require a minimum period of continuous

operation of a foreign disregarded entity’s business, prior to

the disposition of that business, as a condition precedent to

treating the owner as having been engaged in the trade or

business for purposes of characterizing the gain or loss. But,

in the absence of respondent’s exercise of that authority, we

must apply the regulation as written. See Exxon Corp. v. United

States, 88 F.3d 968, 974-975 (Fed. Cir. 1996); Woods Inv. Co. v.

Commissioner, 85 T.C. 274, 282 (1985); Henry C. Beck Builders,

Inc. v. Commissioner, 41 T.C. 616, 628 (1964). As we observed in

sustaining the application of a provision of the consolidated

return regulations, the fact that the regulation gives rise to a

perceived abuse is “a problem of respondent’s own making”, a

problem that respondent has allowed to persist by choosing “not

to amend the regulations to correct the problem.” CSI

Hydrostatic Testers, Inc. v. Commissioner, 103 T.C. 398, 411

(1994), affd. 62 F.3d 136 (5th Cir. 1995).21 
- 48 -

21(...continued)

classified as an association taxable as a corporation”. Sec.

301.7701-3(h)(1), Proposed Proced. & Admin. Regs., 64 Fed. Reg.

66594 (Nov. 29, 1999). (We assume that the consequence of that

approach would be that a CFC’s sale of the stock of the

disregarded entity would be treated as a sale of property

described in sec. 954(c)(1)(B)(i), rather than as a sale of

property described in sec. 954(c)(1)(B)(iii), which is

respondent’s approach in this case, under the existing

regulations.) After receiving a number of unfavorable comments,

respondent, on June 26, 2003, issued Notice 2003-46, 2003-28

I.R.B. 53, announcing his intention to withdraw the so-called

extraordinary transaction rule of the proposed regulations. 

Formal withdrawal of that portion of the proposed regulations

occurred on Oct. 22, 2003. See REG-1110385-99, 68 Fed. Reg.

60305 (Oct. 22, 2003).

VI. Validity of Section 1.954-2(e)(3), Income Tax Regs.

Because we find that Dover UK’s deemed sale of the H&C

assets constituted a sale of assets used in Dover UK’s business

within the meaning of section 1.954-2(e)(3)(ii) through (iv),

Income Tax Regs., we do not address petitioner’s argument that

section 1.954-2(e)(3), Income Tax Regs., is invalid.

VII. Conclusion

Dover UK’s gain on the deemed sale of the H&C assets does

not constitute FPHCI to petitioner pursuant to section

954(c)(1)(B)(iii).

Decision will be entered

under Rule 155.