Rev. Rul. 56-330

Advice has been requested as to the Federal income tax consequences resulting from a proposed formation of a new corporation by three corporations, a partnership, and a certain individual under the circumstances set forth below.

Various business interests contemplated forming a life insurance company, namely M company. Pursuant to a plan, X, Y, and Z corporations will transfer all of their assets and liabilities to M company; a partnership composed of two individuals as partners will transfer certain real estate installment notes to the M company; and, in addition, one partner in his individual capacity will transfer to the new company the stock owned by him in various banks. All of the above-mentioned assets will be transferred in exchange solely for no-par voting stock of M company in proportion to the appraised value of the assets transferred. The X, Y, and Z corporations will distribute the stock received to their stockholders and then dissolve. The assets which will be transferred by the transferor corporations will include the proceeds from the sale of real estate which will be disposed of prior to the transfer of assets.

Section 351 of the Internal Revenue Code of 1954 provides in part as follows:

(a) GENERAL RULE.--No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c) of the corporation. For purposes of this section, stock or securities issued for services shall not be considered as issued in return for property.

Also section 368 of such Code states in part:

(a) REORGANIZATION.--

(1) IN GENERAL.-- * * * the term "reorganization" means--

* * * * * * *

(C) the acquisition by one corporation, in exchange solely for all or a part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), of substantially all of the properties of another corporation, but in determining whether the exchange is solely for stock the assumption by the acquiring corporation of a liability of the other, or the fact that property acquired is subject to a liability, shall be disregarded;

As to the effect on shareholders, section 354 reads, in part:

(a) GENERAL RULE.--

(1) IN GENERAL.--No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.

In the instant case, the exchanges of property by the transferor corporations, the partnership, and one partner in his individual capacity, solely for stock of the M company, taken as a whole, would represent a transaction coming within the provisions of section 351(a) of the Code, inasmuch as the transferors would be in control of M company immediately after the exchanges within the meaning of section 368(c) and section 351(c) of the Code. Therefore, no gain or loss would be recognized to the transferors, including the partners and the one partner in his individual capacity. Neither would any gain or loss be recognized to the M company upon the receipt of the property. However, the exchanges by the stockholders of the X, Y, and Z corporations of the stock thereof for stock of the M company, upon the liquidation of X, Y and Z corporations, would represent taxable transactions, inasmuch as the exchanges would not be made in connection with a reorganization as defined by section 368, supra, for the reason that there would be no continuity of any business enterprise in which the transferor corporations may have engaged.

The regulations covering the income tax laws since the Revenue Act of 1934 state that the purpose of the reorganization provisions of the law is to except from the general rule certain specifically described exchanges incident to such readjustments of corporate structures, made in one of the particular ways, as are required by business exigencies and which effect only a readjustment of continuing interests in property under modified corporate forms. These regulations state further, and it is the established policy of the Internal Revenue Service, that requisite to a reorganization under the law is the continuity of the business enterprise under the modified corporate form. The Internal Revenue Code of 1954 has not changed these basic concepts with respect to corporate reorganizations.

In the instant case, as the M company would engage in a new business which would be entirely different from the activities now being carried on by the X, Y, and Z corporations, the requirement with respect to the continuity of business enterprise would not be satisfied. Therefore, the transactions between the transferor corporations and the M company would not qualify as reorganizations.

Accordingly, since it is held that the exchanges of property by the transferor corporations, the partnership, and the individual, solely for stock of the M company, would constitute a transaction coming within the provisions of section 351(a) of the Code, the basis of the assets acquired by the M company would be the same as it would be in the hands of the transferors, pursuant to section 362(a) of the Code. The exchanges by the stockholders of the X, Y, and Z corporations of their stock in such corporations for stock of the M company would connote transactions falling under the provisions of section 1002 of the Code, and, therefore, gain or loss would be recognized to the stockholders of the transferor corporations measured by the difference between the cost or other basis of the stock exchanged and the fair market value of the M company stock received in the exchange. Such gain or loss would represent capital gain or loss, as the case may be, under the provisions of subchapter P of the Code. Under section 1012, the basis of the stock of M company in the hands of the stockholders of the transferor corporations will be the fair market value of the said stock when received.

The decision in Ernest F. Becher et al. v. Commissioner, 221 Fed. (2d) 252, is based on facts and circumstances different from those here involved and is not controlling in the instant case.