Rev. Rul. 79-71

ISSUE

Are the requirements of Rev. Rul. 75-561, 1975-2 C.B. 129, for a reorganization pursuant to section 368(a)(1)(F) of the Internal Revenue Code of 1954 satisfied when a service corporation and a corporation engaged solely in the business of leasing facilities to the service corporation are merged into a new corporation?

FACTS

X was a state M service corporation whose only class of stock, voting common stock, was owned equally by A and B. Y was a state M corporation engaged solely in the business of leasing to X the building that Y owned and in which X carried on its service operations. A and B equally owned Y's only class of stock, voting common stock. In January 1977, X and Y were merged with and into a new corporation (Newco) pursuant to the law of state M. The X and Y common stock held by A and B was exchanged for Newco voting common stock of equivalent value. Newco continued unchanged the service business of X in the building formerly leased by X from Y that Newco now owned.

LAW AND ANALYSIS

The applicable section of the Code is section 368(a)(1)(F).

Section 368(a)(1)(F) of the Code provides that the term reorganization means a mere change in identity, form, or place of organization, however effected.

Rev. Rul. 75-561 provides that the combination of two or more corporations may qualify as a reorganization within the meaning of section 368(a)(1)(F) of the Code if (1) there is complete identity of shareholders and their proprietary interests in the transferor corporations and acquiring corporations; (2) the transferor corporations and the acquiring corporation are engaged in the same business activities or integrated activities before the combination; and (3) the business enterprise of the transferor and the acquiring corporations continues unchanged after the combination.

In the present case, requirement (1) of Rev. Rul. 75-561 regarding qualification as a reorganization under section 368(a)(1)(F) of the Code has been met. A and B have common stock in Newco completely identical to that held in X and Y. Requirement (2) is satisfied because the activities of X and Y were integrated prior to the merger. Y provided the facilities in which X carried on its service operations. The question then remains whether requirement (3), the unchanged continuation of the business enterprise of X and Y, has been met when Y's leasing activities have been terminated by the merger. Such requirement has been satisfied because Newco continues X's service operations. In addition, although Y no longer leases the building to X, Y's principal premerger activity, the providing of a building as a service facility continues after the merger.

HOLDING

The merger of X and Y into Newco satisfies the requirements of Rev. Rul. 75-561 for a reorganization under section 368(a)(1)(F) of the Code.