Rev. Rul. 65-286

Rev. Rul. 65-286

Advice has been requested whether the distribution by a parent corporation to its shareholders of all of the stock of its wholly-owned subsidiary, under the facts described below, constitutes a nontaxable distribution in its entirety under the provisions of section 355(a)(1) of the Internal Revenue Code of 1954 or whether a portion of such stock constitutes `other property' within the meaning of section 355(a)(3) and section 356 of the Code.

P corporation has held 90 shares of the outstanding stock of S corporation for more than 5 years on the date of distribution. One year before the date of distribution, P corporation acquired the remaining 10 shares of S corporation stock in a transaction in which gain was recognized. Six months before the date of distribution, S corporation effected a recapitalization which qualified as a reorganization under section 368(a)(1)(E) of the Code. Pursuant to the plan of reorganization, P corporation exchanged its 100 shares of S corporation stock solely for 50 shares of new class A stock of S corporation and 50 shares of new class B stock of S corporation, and under section 354 of the Code, no gain or loss was recognized to P corporation on this exchange. Six months after the reorganization and for proper business reasons, all of the new class A and class B stock of S corporation was distributed by P corporation to its shareholders.

Section 355(a)(3) of the Code provides in part as follows:

* * * stock of a controlled corporation acquired by a distributing corporation by reason of any transaction which occurs within 5 years of the distribution of such stock and in which gain or loss was recognized in whole or in part, shall not be treated as stock of such controlled corporation, but as other property. Emphasis supplied.

The term `stock' is not defined in Subchapter C of the Code. However, the Internal Revenue Service considers this reference to mean a `stock interest' in a corporation and not merely the evidences thereof such as the stock certificates.

Accordingly, since P corporation acquired in a transaction in which gain or loss was recognized a 10 percent stock interest in S corporation within 5 years of the date of distribution of that stock interest, 10 percent of the stock distributed by P corporation to its shareholders is considered `other property' within the meaning of section 356 of the Code even though the share certificates (new class A and B stock) actually distributed were acquired by P corporation in a transaction in which no gain or loss was recognized. The remaining 90 percent of the stock distributed by P corporation to its shareholders cannot by reason of section 355(a)(3) of the Code be classed as `other property' within the meaning of section 356 of the Code since this stock interest was held by P corporation for more than 5 years on the date of the distribution.