Rev. Rul. 70-111

Advice has been requested as to the application of section 1491 of the Internal Revenue Code of 1954 to the transaction described below.

X, a domestic corporation, owns 100 percent of the only class of outstanding stock of Y, a foreign corporation, and 75 percent of the only class of outstanding stock of Z, also a foreign corporation. The remaining 25 percent of Z stock is owned by shareholders unrelated to X. X proposes to sell all of the Y stock to Z for cash.

Section 304(a)(1) of the Code provides, in pertinent part, that for purposes of section 302 of the Code, if a person is in control of each of two corporations, and in return for property, one of the corporations acquires stock in the other corporation from the person so in control, then the property will be treated as a distribution in redemption of the stock of the corporation acquiring the stock. In any such case, the stock so acquired will be treated as having been transferred by the person from whom acquired, and as having been received by the corporation acquiring it, as a contribution to the capital of the corporation. Section 304(c) of the Code provides, in pertinent part, that for purposes of section 304 of the Code, control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote, or at least 50 percent of the total value of the shares of all classes of stock.

Section 1491 of the Code, in part, imposes an excise tax on the transfer of stock or securities by a domestic corporation to a foreign corporation as a contribution to capital. Section 1492 of the Code, in part, provides that the tax imposed by section 1491 of the Code will not apply if before the transfer it has been established to the satisfaction of the Secretary of the Treasury or his delegate that such transfer is not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income taxes.

In the instant case the sale by X of the Y stock to Z is governed by section 304(a) of the Code and, therefore, the sales proceeds will be treated as received by X in redemption of the stock of Z. The stock of Y will be treated, under section 304(a)(1) of the Code, as having been transferred by X to Z as a contribution to the capital of Z.

Accordingly, the proposed transfer of the Y stock to Z will be subject to the excise tax imposed by section 1491 of the Code unless it is previously established that the transfer is not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income taxes.