Rev. Rul. 56-344

The Internal Revenue Service has been requested to explain the application of section 355 of the Internal Revenue Code of 1954 to a `spinoff' reorganization in connection with the distribution of stock of a controlled corporation.

X Corporation was organized in the early thirties under the laws of State A and presently has outstanding shares of preferred and common stock. Its business was raising, processing, and marketing turkeys, and its product sold throughout the middle west as well as in certain eastern cities.

Years later the corporation purchased property in State B and established a branch operation. At first the branch conducted its operations in the same manner as in State A , except that it marketed its turkeys in the Rocky Mountain area. In 1945, however, the branch began handling broilers (chickens) in addition to its turkeys, and in time the broiler business became a very substantial part of its operation.

The broiler business was successful until the last two or three years when growers and processors in another area because of cheaper costs, were able to ship broilers into the western market at prices below X Corporation's production and processing costs. The western branch plant in State B was forced to close, and in 1954 the corporation entered into a long-term lease of a new plant located in State C transferring broiler operations to the new plant so that it could compete in the western market. The plant in State B was sold. The corporation will continue its turkey business in the western area as before, but the turkeys will be processed in a custom plant.

Certain of the stockholders of X Corporation have urged the discontinuance of the branch operations, while others oppose such discontinuance. Accordingly, it is planned to separate the two businesses. A plan has been proposed which involves the issuance of two new classes of common stock (voting and non-voting) in exchange for the existing common shares, the organization of a new corporation under the laws of State B , and the transfer to the new corporation of the assets subject to the liabilities relating to the southern and western operations in exchange for all of the common stock of such corporation.

The stock of the new corporation will be distributed to those stockholders of X Corporation who desire to continue the present branch activities in exchange for all or a portion of X's stock, both common and preferred. After the distribution of the stock of the new corporation, each stockholder will have approximately the same interest in the total assets of the two corporations as he now has in the assets of X . However, some stockholders will have an interest in both corporations while some will have an interest only in X Corporation.

Section 355 of the Internal Revenue Code of 1954, with respect to a distribution of stock and securities of a controlled corporation, provides in part as follows:

(a) EFFECT ON DISTRIBUTEES.-

(1) GENERAL RULE.-If-

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(D) as part of the distribution, the distributing corporation distributes-

(i) all of the stock and securities in the controlled corporation held by it immediately before the distribution, or

(ii) an amount of stock in the controlled corporation constituting control within the meaning of section 368 (c), and it is established to the satisfaction of the Secretary or his delegate that the retention by the distributing corporation of stock (or stock and securities) in the controlled corporation was not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax, then no gain or loss shall be recognized to (and no amount shall be includible in the income of) such shareholder or security holder on the receipt of such stock or securities.

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(b) REQUIREMENTS AS TO ACTIVE BUSINESS.-

(1) IN GENERAL.-Subsection (a) shall apply only if either-

(A) the distribution corporation, and the controlled corporation (or, if stock of more than one controlled corporation is distributed, each of such corporations), is engaged immediately after the distribution in the active conduct of a trade or business, or

(B) immediately before the distribution, the distributing corporation had no assets other than stock or securities in the controlled corporations and each of the controlled corporations is engaged immediately after the distribution in the active conduct of a trade or business.

(2) DEFINITION.-For purposes of paragraph (1), a corporation shall be treated as engaged in the active conduct of a trade or business if any only if-

(A) if it is engaged in the active conduct of a trade or business, or substantially all of its assets consist of stock and securities of a corporation controlled by it (immediately after the distribution) which is so engaged,

(B) such trade or business has been actively conducted throughout the 5-year period ending on the date of the distribution, * * *.

The question presented is whether the new operations in the south should be considered a new business for the five-year requirement under the provisions of section 355(b)(2) of the Code, or whether the business may be considered to have been in existence since 1945 when similar operations were commenced in State B . Under the 1954 Code and the regulations, where a new business is begun in a different territory, for the purposes of the five-year limitation, the new business will only be considered to have been in existence on the date that the activities commenced. See example (9), section 1.355-1(a), of the Income Tax Regulations. In the instant case, however, the transfer was merely a transfer of an already existing five-year business to a new location and not the formation of a new business. Therefore, example (8), section 1.355-1(a) of the Income Tax Regulations, is applicable.

Accordingly, it is held that the transfer by the X Corporation to the new corporation of the net assets relating to the western and southern activities in exchange for the common stock of X will constitute a reorganization within the meaning of section 368(a)(1)(B) of the Code. No gain or loss will be recognized to either corporation as a result of the transfer (sections 361 and 1032 of the Code). The basis of the assets received by the new corporation as a result of the transfer will be the same as the basis of such assets in the hands of X Corporation (section 362 of the Code). The accumulated earnings and profits of X Corporation should be allocated between such corporation and the new corporation in accordance with section 312(i) of the Code. Under the provisions of section 355 of the Code, no gain or loss will be recognized to those stockholders who exchange all or a portion of their X stock, whether preferred or common or both, for shares of common stock of the new corporation. The basis of the stock of the new corporation in the hands of its stockholders will be the same as the cost or other basis of the stock of X Corporation surrendered in exchange therefor under section 358(a) of the Code. None of the stock of the new corporation in the hands of the stockholders will constitute `section 306 stock' as defined in section 306(c) of the 1954 Code.