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Section 338 and its Foolish Consistency Rules - The Hobgoblin of Little Minds

51 Pages Posted: 8 Jun 2007  

Douglas A. Kahn

University of Michigan Law School


When Congress adopted Section 338 in 1982, it included two sets of consistency rules to prevent the continued availability of a means of extending the scope of the General Utilities doctrine by permitting a target corporation to select only some of its assets for nonrecognition of income. The principal purpose of those rules was eliminated in 1986 when Congress repudiated virtually all of the General Utilities doctrine. As a consequence, a number of commentators have urged the repeal of the consistency rules.

In January, 1992, the Treasury promulgated proposed regulations that would substantially modify the regulatory application of the consistency and related rules so as to eradicate much of their bite and limit the circumstances in which they will apply. In 1994, with a few modifications, the proposed regulations were finalized. The purposes of this article are to examine whether there is any longer a reason for concern because a target corporation can choose selected assets for nonrecognition and to what extent the 1994 regulations properly deal with potentially abusive circumvention of tax goals.

Before examining the current status of the consistency requirements, the historical background that led to the adoption of Section 338 and the operation of the section is discussed. The historical background includes: the judicially created Kimbell-Diamond rule, the codification and modification of that rule by the old version of Section 334(b)(2), the operation of the old version of Section 337 that provided nonrecognition for certain liquidating sales of corporate assets, and the replacement of the old version of Section 334(b)(2) by Section 338. The general operation of Section 338 is then sketched, and the special election provided by Section 338(h)(10) is examined. Finally the consistency rules are examined and critiqued.

Keywords: Section 338, taxation, consistency rules, 338(h)(10), Kimbell-Diamond

JEL Classification: H20

Suggested Citation

Kahn, Douglas A., Section 338 and its Foolish Consistency Rules - The Hobgoblin of Little Minds. Quinnipiac Law Review, Vol. 14, p. 31, 1994. Available at SSRN:

Douglas Kahn (Contact Author)

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States
734-647-4043 (Phone)

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