Rev. Rul. 56-451

Advice has been requested as to the tax effects of the `spin-off' transaction set forth below.

A corporation is engaged in publishing four trade magazines. Each is circulated monthly without charge to executives, engineers, and production men in the particular industrial field covered. The magazines function as a news reporting service in the technical fields covered. The space in the magazines is devoted to advertisements and technical articles of interest to men in the industrial field with which the particular magazine deals.

The magazine relating to the metal working industry has its own editorial staff and advertising space salesmen who devote all of their time to that publication alone. The offices of this magazine's staff, although located in the same building, are separate from the staffs of the other magazines which relate to the electrical and electronic industries. Separate accounts are kept on the books of the corporation for each publication. The only employees of the corporation who serve both the metal work magazine and the other magazines are the general officers and certain clerical and production employees. The magazines serve two entirely different fields. The readers and advertisers of the metal magazine are different from the readers and advertisers of the other magazines. Due to the complex nature of the metal field, the editorial content of the metal magazine is different and more voluminous than that of the other magazines. All of the maganizes, except one serving the electrical industry, have been published for a period of more than five years.

In view of the differences between the problems connected with the publishing of the metal magazine as contrasted with the publishing of the other magazines, the corporation desired to operate the two activities under separate corporations. This will serve to prevent the assets of one operation from being subject to the liabilities of the other operation. Furthermore, it will make feasible the securing of high-level management for the first magazine so that the president of the corporation can devote his time and attention to a planned expansion of the electrical papers.

Accordingly, all of the assets directly pertaining to the publication of the metal magazine are transferred to a new corporation plus a certain amount of cash needed for working capital. In exchange for the assets received, the new corporation issued to the old corporation all the shares of its common stock. All of the common stock of the new corporation was then distributed pro rata to the shareholders of the old corporation.

In view of the foregoing, the Internal Revenue Service holds that the transfer of a part of the assets of the old corporation to the new corporation pursuant to the plan, in exchange for common stock of the new corporation which was distributed to the shareholders of the old corporation, contsitutes a reorganization under section 368(a)(1)(D) of the Internal Revenue Code of 1954. No gain or loss is recognized to the old corporation on the exchange. Furthermore, no gain or loss is recognized to, and no amount is includible in the income of, the shareholders of the old corporation on the receipt by them of the stock of the new corporation as a distribution from the old corporation under section 355 of the Code. The basis of the stock of the old corporation in the hands of the shareholders should be allocated between such stock and the stock of the new corporation received by them in accordance with regulations pertaining to section 358 of the Code. The basis of the assets in the hands of the new corporation is the same as in the hands of the old corporation under section 362(b) of the Code. As provided in section 312(i) of the Code, a proper allocation with respect to the earnings and profits of the old corporation and the new corporation should be made in accordance with regulations pertaining to that section.