Mary owns all of Able Corporation’s stock. Able owns all the shares of Baker and Cross Corporations. The three corporations have filed a consolidated calendar year tax return for several years. After consulting with her tax accountant, Mary decides that it will be more beneficial if the corporations are restructured as S corporations so their income is subject to a single layer of tax. The restructuring process is complex because Baker holds some valuable franchises that cannot be transferred. The restructuring occurred on October 23 of the current year. On October 23, Able transfers all of its assets and liabilities to Baker, and the two corporations merge with Baker as the survivor. As part of the restructuring, Mary receives all the stock of Baker. Six hours after the first transaction, Baker sells Mary all the stock in Cross for $2 million. Thus, the consolidated group survived for only six hours during the restructuring. Immediately after the restructuring, Baker incurs substantial losses. Can Baker file a consolidated return for the restructuring year and deduct the post-restructuring losses against prior year consolidated income?

A partial list of resources includes:

• Reg. Sec. 1.1502-75(a)(2)

• Reg. Sec. 1.1502-75(d)(2)

• Reg. Sec. 1.1502-76(b)(1)

• The Falconwood Corporation v. U.S.(96 AFTR 2d 2005-5977), 2005-2 USTC ¶50,597 (Fed. Cir., 2005)