Patel owned all the stock of ParentCo. ParentCo owned all the stock in Subby1 and Subby2, two subsidiary corporations. The three corporations have filed a consolidated, calendar year tax return since they were formed in 1998. Patel decided that the corporate income tax was too much of a burden on the corporations, and restructured them in the following manner: Subby1 merged with ParentCo. Legally, Subby1 was the survivor. Sixteen hours (but on the same day) after the merger, Subby1 distributed the stock of Subby2 to Patel in a tax-free reorganization. This happened on Nov. 1. The companies became S-corporations on January 1 of the following year. Subby1 suffered a loss in the period Nov. 2–Dec. 31. Can this loss be included on the final consolidated return?
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