Rev. Rul. 67-326

Advice has been requested whether the nonrecognition provisions of section 361(a) of the Internal Revenue Code of 1954 apply to a transaction qualifying as a merger under applicable State law where the acquiring corporation exchanged the stock of its parent for all of the assets of an unrelated corporation and whether section 354(a) of the Code will apply to the exchange by the shareholders of the acquired corporation of all of their stock of the acquired corporation for stock of the parent of the acquiring corporation.

Corporation S is a wholly owned subsidiary of P corporation. In a transaction which qualified as a merger under the law of the State in which S and x are incorporated, S acquired from X , an unrelated corporation, all of its assets and assumed all of its liabilities in exchange for stock of P which had previously been contributed to S . Pursuant to the plan of reorganization, the shareholders of X exchanged their stock of X for stock of P .

Section 361(a) of the Code provides in part for the nonrecognition of gain or loss if a corporation a party to a reorganization exchanges property, in pursuance of a plan of reorganization, solely for stock in another corporation a party to the reorganization. In order for this section to be applicable to the exchange of assets by X for stock of P , X and P must be parties to the reorganization.

Section 354(a) of the Code provides in part for the nonrecognition of gain or loss if stock in a corporation a party to a reorganization is, in pursuance of the plan of reorganization, exchanged solely for stock in such corporation or in another corporation a party to the reorganization. In order for this section to be applicable to the exchange of X stock by the shareholders of X for stock of P, X and P must be parties to the reorganization.

Section 368(b) of the Code defines a party to a reorganization as:

(1) a corporation resulting from a reorganization, and

(2) both corporations, in the case of a reorganization resulting from the acquisition by one corporation of stock or properties of another.

Section 368(b) of the Code provides that in the case of a reorganization qualifying under paragraph (1)(B) or (1)(C) of section 368(a) of the Code, if the stock exchanged for the stock or properties of another corporation is stock of a corporation which is in control of the acquiring corporation, the term `a party to a reorganization' includes the corporation so controlling the acquiring corporation. Section 368(b) of the Code does not include, however, as a party to a reorganization a corporation which is in control of the acquiring corporation in a reorganization qualifying under section 368(a)(1)(A) of the Code.

Accordingly, although the transaction described is a statutory merger of S and X under State law, the nontaxable provisions of section 361(a) of the Code will not apply to the exchange of the assets of X for stock of P and section 354(a) will not apply to the exchange by the shareholders of X of their stock of X for stock of P .

A reorganization under section 368(a)(1)(C) of the Code is 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. As indicated, section 368(b) of the Code includes as a party to a reorganization described in section 368(a)(1)(C) of the Code a corporation which is in control of the acquiring corporation. Therefore, if the transaction otherwise qualifies as a reorganization as defined in section 368(a)(1)(C) of the Code, the nonrecognition provisions of sections 361(a) and 354(a) of the Code will apply to the exchanges described.