Rev. Rul. 71-384

X corporation has owned all of the stock of Y corporation since 1960. Since that time both X and Y have been engaged in the active conduct of a trade or business. X, for valid business purposes, distributed all of the stock of Y to the X shareholders in 1970. At the time of the distribution and at the close of the taxable years of X and Y in which the distribution took place, neither X nor Y had any current or accumulated earnings and profits.

Held, in the absence of any earnings and profits, the distribution could not have been used as a device for the distribution of the earnings and profits of X or Y or both within the meaning of section 355(a)(1)(B) of the Internal Revenue Code of 1954. Therefore, the distribution of the Y stock to the X shareholders qualifies as a distribution under section 355(a)(1) of the Code.