Rev. Rul. 75-248

Advice has been requested whether, under the circumstances described below, the acquisition of stock is a "purchase" within the meaning of section 382(a)(4) of the Internal Revenue Code of 1954 for purposes of determining whether a corporation is precluded from using certain net operating loss carryovers.

As of June 1, 1973, X corporation, a calendar year taxpayer, owned 25 percent of the total outstanding stock of Y corporation. X acquired the Y stock by cash purchases over a 4-year period. In August of 1974, X transferred to Y property having a fair market value of 600x dollars in exchange for sufficient shares of Y common stock to enable X to own 85 percent of the then total number of outstanding shares. The transaction qualified as a tax-free exchange under section 351(a) of the Code. For the years 1969 through 1973 Y sustained substantial net operating losses.

The acquisition of stock in Y, by X, was not made to evade or avoid income tax within the meaning of section 269 of the Code.

Y did not continue to carry on a trade or business substantially the same as that conducted before the acquisition.

Section 382(a) of the Code provides, in part, that if one or more of the ten largest unrelated stockholders in a corporation own, at the end of the corporation's taxable year, a percentage of the total fair market value of the outstanding stock, as a result of purchase of stock, which percentage is at least 50 percentage points more than such person or persons owned at either the beginning of such taxable year or the prior taxable year, and if the corporation has not continued to carry on a trade or business substantially the same as that conducted before the change in percentage ownership of the fair market value of such stock, the net operating loss carryovers of such corporation to such taxable year and subsequent taxable years shall not be included in the net operating loss deduction for such taxable years.

Section 382(a)(4) of the Code and section 1.382(a)-1(e)(1)(i) of the Income Tax Regulations provide, in part, that there is a purchase of stock only if the basis of such stock is determined solely by reference to its cost to the holder thereof.

For purposes of section 382(a)(4) of the Code and section 1.382(a)-1(e)(1)(i) of the regulations, if the basis of the stock is determined by reference to its basis in the hands of the transferor thereof or of another person, or by reference to the basis of property (other than cash or its equivalent) exchanged for such stock, then the basis of such stock is not determined solely by reference to its cost to the acquirer. Thus, an acquisition by gift or bequest is not a purchase. However, if stock is received in a "taxable exchange", its basis is considered to be determined solely by reference to its cost to the acquirer and therefore deemed a purchase.

Section 1012 of the Code provides, generally, that the basis of property shall be the cost of such property. However, under section 358(a)(1), in the case of an exchange to which section 351 applies, the basis of property received under such section without the recognition of gain or loss shall be the same as that of the property exchanged subject to certain adjustments that are not applicable here. Thus, pursuant to section 358, the basis of the stock received under section 351 in exchange for property shall be the same as the transferor's basis in the transferred property and not cost as determined under section 1012.

Accordingly, in the instant case, since the stock acquisition is a tax-free exchange under section 351(a) of the Code, it is not a purchase within the meaning of section 382(a)(4) and, therefore, the net operating loss carryovers of Y are available to it for inclusion in the net operating loss deduction for the year of the exchange and subsequent taxable years.