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and the LOF Glass divestiture transaction.5 Contrary to the
majority's assumption, the unadorned descriptions of the events
in the regulation's two examples indicate the lack of connection
between the intragroup sale of section 38 assets in year 1 and
the sale of the stock of the purchaser to a third party outside
the group in year 2. The majority goes on to disregard the
obvious connection--supplied by the intent, manifested
contemporaneously with the drop-down to LOF Glass, to accomplish
the end result of the split-off--that binds the steps in the case
at hand in an integrated transaction.6
The transactions in the case at hand are not just two
unconnected sales. They evidence a flow of events that comprise
a two-step divestiture, the second step of which is an exchange
5 There are at least three significant differences between the
facts of the examples in the section 1502 regulation and the
facts of our case. In the examples, the sale of the section 38
assets and the sale of the purchaser's stock occur in different
tax years, whereas in our case they occur in the same year; the
first sale in the examples appears to be made to a preexisting
member of the group, whereas in our case the transfer is made to
a newly created subsidiary organized to do the deal, including
the second step; and the examples concern two unrelated sales,
whereas the first transaction in our case is a drop-down of
assets that is an integral and necessary step of the plan to
accomplish the agreed upon tax-free split-off exchange of shares
that is intended to follow.
6 Events should be deemed to have a connection for tax
purposes when dictated by the logic of events that has to do with
cause and effect relationships and necessary connections or
outcomes. Under that formulation, there is no connection between
the sales in the examples in the sec. 1502 regulation and there
is a connection between the drop-down and the split-off in the
case at hand.
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