Rev. Rul. 68-637

Advice has been requested whether the assumption of outstanding unexercised stock warrants and outstanding employee stock options under the circumstances described below violates the `solely for all or a part of its voting stock' requirement of section 368(a)(1)(C) of the Internal Revenue Code of 1954.

Pursuant to a plan of reorganization, X corporation acquired all the assets of Y corporation in exchange for some of X's voting stock. Prior to this transaction Y had issued stock warrants to certain investors and had granted options to certain employees to purchase shares of its stock. Pursuant to the plan of reorganization, X agreed to substitute its stock for that of Y under the terms of the stock warrants and options issued by the latter. X accordingly agreed that upon the exercise of any of the warrants or stock options outstanding as of the date of exchange, it would issue to the warrant and option holders that number of shares of X voting stock that they would have been entitled to receive had they exercised the warrants or options immediately prior to the exchange. Following the acquisition, X continued to conduct the business previously conducted by Y .

The question presented is whether the agreement by X to substitute its stock for that of Y under the terms of the stock warrants and options issued by the acquired corporation constitutes nonqualifying consideration under the definition contained in section 368(a)(1)(C) of the Code.

A reorganization as described in section 368(a)(1)(C) of the Code is the acquisition by one corporation in exchange solely for all or 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. In determining whether the exchange is `solely' for stock, section 368(a)(1)(C) of the Code provides that the assumption by the acquiring corporation of a liability of the other, or the fact that property is acquired subject to a liability, shall be disregarded.

The arrangements under which Y was obligated to issue its stock to the holders of the warrants and options constitute a contractual liability of Y . Thus, the undertaking by X to discharge Y's obligation by substituting its own stock for that of Y was no different than the assumption of a liability under any other executory contract of Y and such assumption is to be disregarded as provided in section 368(a)(1)(C) of the Code.

Accordingly, the assumption of Y's outstanding warrants and outstanding employee stock options by X and the substitution of the latter corporation's stock thereunder pursuant to a transaction otherwise qualifying under section 368(a)(1)(C) of the Code, does not violate the `solely for all or a part of its voting stock' requirement of this section of the Code.