Tax deductions in corporate transactions

[Carol V. Calhoun]

Under Code section 162 (incorporated by reference into 404), a corporation cannot deduct expenses of another corporation, even if the two are part of the same controlled group.  So for example,  a parent company cannot take deductions for contributions it makes to its 401(k) plan on behalf of employees of a subsidiary. There is an exception in 404(g)(2) in the case of termination liability that permits a corporation to deduct termination liability paid on behalf of another member of the controlled group.  I have what I think is a simple question, but am going around and around on how it should be resolved.  Assume in all cases the the party wanting to take a deduction actually will actually pay the expense.

Corporation A wants to sell Corporation B to Corporation C, which is unrelated.  Corporation B has both a 401(k) plan and a defined benefit plan.  Corporation C does not want to take over either plan.  So before the transaction, Corporation A takes over both plans, assuming all the liabilities.  The 401(k) plan is terminated immediately before the transaction, but not all liabilities have been paid at the time of the transaction.  Rather than holding up the transaction for the 60 days until the DB plan can be terminated, a resolution is adopted to terminate the DB plan before the transaction, but it is terminated shortly after the transaction.

It takes a little while to work out all the liabilities under either plan.  (E.g., there is a liability for employer matching contributions under the 401(k) plan.)  So contributions must be made after the transaction to cover liabilities from before the transaction.   In the case of the defined benefit plan, can Corporation A take a deduction if it pays the termination liability, because at the time the liability was incurred,  Corporations A and B were part of the same controlled group?  Or because at the time of the termination Corporation A was the sponsor of the plan and thus liable for the termination liability?  Or is it barred from doing so because the employees covered by the plan were all Corporation B employees and the termination (and thus the liability) occurred only after Corporation B ceased to be part of the controlled group?  Conversely, is Corporation B barred from taking a deduction if it pays the liability because it is no longer a sponsor of the plan at the time of the contribution?

Who, if anyone, can take a tax deduction for the contribution to the 401(k)?  Is Corporation A barred from taking a tax deduction if it makes the contribution because the liability for it relates to employees of a different corporation?  Conversely, is Corporation B barred from taking a tax deduction if it makes the contribution because it is no longer a sponsor of the plan in question?

And does the answer as to the 401(k) change if Corporation A terminates it only after the transaction?

This has to come up all the time, but for some reason I've never been asked the question before.