Rev. Rul. 72-522

Advice has been requested whether the "solely for voting stock" requirement of section 368(a)(1)(B) of the Internal Revenue Code of 1954 is satisfied under the circumstances described below.

Corporation X acquired all of the outstanding stock of Y corporation from the shareholders of Y in exchange for voting stock of X. X was in control of Y immediately after the exchange within the meaning of section 368(c) of the Code. Y was a solvent corporation but had need of additional working capital for expansion purposes. At the time of the exchange of the Y stock for X stock, and as part of the overall plan, X purchased authorized but unissued shares of Y stock for cash as a means of providing additional capital to Y. None of the cash received by Y was distributed or otherwise paid out to its former shareholders.

Since the acquisition of all of the outstanding stock of Y in exchange for voting stock of X and the acquisition by X of unissued shares of Y for cash was part of an overall plan, the issue presented is whether the exchange by the former Y shareholders of their Y stock for X stock is within the provisions of sections 354(a)(1) and 368(a)(1)(B) of the Code.

Section 368(a)(1)(B) of the Code provides, in part, that the term "reorganization" means the acquisition by one corporation, in exchange solely for all or a part of its voting stock, of stock of another corporation if immediately after the acquisition the acquiring corporation has control of such other corporation.

Section 354(a)(1) of the Code provides, in part, that no gain or loss will be recognized if stock in a corporation a party to a reorganization is in pursuance of a plan of reorganization exchanged solely for stock in another corporation a party to the reorganization.

Section 1032(a) of the Code provides that no gain or loss will be recognized to a corporation on the receipt of money or other property in exchange for stock (including treasury stock) of such corporation.

In the instant case Y was not a shareholder of its own authorized but unissued stock. Furthermore, the cash payment made by X to Y for unissued stock was not part of the transaction between X and the former Y shareholders and since the former Y shareholders did not receive any portion of the cash payment, either directly or indirectly, such payment is considered to be separate from the acquisition of their outstanding stock. Therefore, even though the purchase of the authorized but unissued stock of Y was part of the overall transaction, the transaction was not a part of the reorganization exchange for the purposes of sections 368(a)(1)(B) and 354(a)(1) of the Code. See Revenue Ruling 69-142, C.B. 1969-1, 107, concluding that the exchange of debentures of an acquiring corporation for debentures of an acquired corporation where the acquired corporation's debentures were held predominantly by nonstockholders does not affect the stock for stock exchange under section 368(a)(1)(B) of the Code. See also Revenue Ruling 69-91, C.B. 1969-1, 106, where a purchase by an acquiring corporation of convertible debentures of an acquired corporation was held not to be part of a stock for stock exchange.

Accordingly, since X used solely its voting stock in acquiring the outstanding Y stock from the former shareholders of Y and since the former shareholders of Y received solely voting stock of X in exchange for their Y stock and since X was in control of Y immediately after the transaction, the requirements of section 368(a)(1)(B) of the Code are met. Therefore, no gain or loss is recognized to the former shareholders of Y upon the exchange of their Y stock for X stock under section 354(a)(1) of the Code. Furthermore, no gain or loss is recognized to Y on the receipt of cash from X in exchange for the unissued stock of Y under the provisions of section 1032(a) of the Code.