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a corporation in a taxable transaction within the 5-year period
must be restricted to acquisitions from outside the affiliated
group in order to carry out the legislative intent of section
355(b), which, it concluded, was to prevent “the temporary
investment of liquid assets in a new business in preparation for
a 355(a) division.” Id. at 506 (emphasis added).10 Respondent
adopted that reasoning in Rev. Rul. 78-442, supra, and Counsel
did so in G.C.M. 35633, supra, both of which involve the
incorporation of an operating division preparatory to a spinoff
of the newly formed subsidiary in a transaction intended to
qualify as a tax-free reorganization under section 368(a)(1)(D).
In both pronouncements, the incorporation of the more-than-
5-year-old division involves the assumption of liabilities in
excess of the transferor’s basis, resulting in gain recognized to
the transferor under section 357(c). Respondent and Counsel,
like the Court of Appeals for the Second Circuit in Commissioner
v. Gordon, supra, determined that section 355(b)(2)(C) is
intended to prevent the acquisition of a new business from
outside the affiliated group within the 5-year period.
Therefore, they found no violation of that provision by virtue of
10 In Baan v. Commissioner, 45 T.C. 71 (1965), revd. and
remanded 382 F.2d 485 (9th Cir. 1967), we reached the same result
as the Court of Appeals for the Second Circuit, but on the ground
(rejected by the Court of Appeals) that the incorporation of the
subsidiary was, in fact, a nonrecognition transaction because the
gain attributable to the receipt of boot was eliminated in
consolidation.
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