Rev. Rul. 76-123
Advice has been requested concerning the treatment for Federal income tax purposes of the transaction described below.
Individual A owned all the stock of X corporation, which was incorporated in State O. Individual B, who is unrelated to A, owned all the stock of Y corporation, which was incorporated in State P. A and B determined that the businesses operated by X and Y could be improved if their interests in X and Y were combined while at the same time preserving the separate corporate existence of X and Y. A and B also decided that the laws of State P were more favorable to the operation of the combined enterprise. To carry out their plan, A and B transferred all of their stock in X and Y to a newly organized corporation, Z, incorporated in State P, in exchange for, respectively, 60 percent and 40 percent of all of the outstanding stock of Z. In addition, B received from Z 10x dollars in cash. The consideration received by A and B was in each case equal to the fair market value of the stock exchanged. As part of this plan, X then distributed all of its assets to Z in complete liquidation, and Y remained as a wholly owned subsidiary of Z.
Section 351(a) of the Internal Revenue Code of 1954 provides, in general, for the nonrecognition of gain or loss on the transfer by one or more persons of property to a corporation solely in exchange for stock or securities in such corporation if, immediately after the exchange, such person or persons are in control of the corporation to which the property was transferred.
Section 351(c) of the Code provides that, for purposes of determining control under section 351, the fact that any corporate transferor distributes part or all of the stock that it receives in the exchange to its shareholders will not be taken into account.
Section 351(b) of the Code provides, in part, that if section 351(a) would apply to an exchange but for the fact that money is received in addition to the stock received, then any gain recognized will not exceed the amount of money received.
Section 368(c) of the Code provides that the term "control" means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of each of the other classes of stock of the corporation.
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 shares of its voting stock, of the outstanding stock of another corporation if, immediately after the transaction, the acquiring corporation has control of such other corporation.
Section 368(a)(1)(C) of the Code provides, in part, that a reorganization is the acquisition by one corporation, in exchange solely for all or a part of its voting stock, of substantally all of the properties of another corporation, but in determining whether the exchange is solely for stock, the assumption by the acquiring corporation of a liability of the other, or the fact that property acquired is subject to a liability, is disregarded.
In Rev. Rul. 67-274, 1967-2 C.B. 141, a corporation, pursuant to a plan of reorganization, acquired all the outstanding stock of another corporation from the shareholders in exchange for voting stock of the acquiring corporation and thereafter, as part of the same plan, the acquiring corporation completely liquidated the acquired corporation. Rev. Rul. 67-274 holds that under these circumstances the acquisition of the stock of the acquired corporation and its liquidation by the acquiring corporation are part of the overall plan of reorganization and may not be considered independently of each other for Federal income tax purposes. Rev. Rul. 67-274 concludes that the transaction is not an acquisition of the stock of the acquired corporation qualifying as a reorganization under section 368(a)(1)(B) of the Code but is an acquisition of the assets of the acquired corporation qualifying as a reorganization under section 368(a)(1)(C).
Rev. Rul. 68-357, 1968-2 C.B. 144, holds that section 351 of the Code applies where, as part of an overall plan to consolidate the operations of five businesses, an individual and three corporations transfer property to a corporation that they control immediately after the transfers within the meaning of section 368(c) even though the transfers of property by the corporations are reorganizations within the meaning of section 368(a)(1)(C).
The transfer by A of A's X stock to Z and, as part of the overall transaction, the liquidation of X by Z are interdependent steps in an overall reorganization plan the substance of which is treated for Federal income tax purposes as an acquisition by Z of all of the assets of X solely in exchange for Z voting stock in a transaction qualifying as a reorganization under section 368(a)(1)(C) of the Code, followed by a distribution by X of the Z stock to A in exchange for all of A's X stock. Accordingly, no gain or loss is recognized by X upon the exchange of its property solely for Z stock as provided by section 361(a), and no gain or loss is recognized to A on the exchange of A's X stock solely for voting stock of Z as provided in section 354(a).
Furthermore, the transfer by X of its property to Z in liquidation and the transfer by B of B's Y stock to Z is a transaction within the provisions of section 351(a) of the Code since X and B are in control of Z immediately after the exchanges within the meaning of section 368(c). Pursuant to section 351(c) the distribution by X of the Z stock to A does not violate the control requirement of section 368(c). Accordingly, no loss is recognized to B and no gain is recognized to B in excess of the 10x dollars received by B, as provided in section 351(b), upon the exchange of B's Y stock solely for cash and voting stock of Z. See Rev. Rul. 68-357.
Rev. Rul. 68-349, 1968-2 C.B. 143, holds that the transfer of property by an individual to a newly formed corporation does not qualify under section 351 of the Code where another corporation simultaneously transfers all of its property to the new corporation for the purpose of qualifying the individual's transfer under section 351. Rev. Rul. 68-349 states that the organization of the new corporation is considered under the circumstances to be merely a continuation of the transferor corporation. Rev. Rul. 68-349 is distinguishable from the instant case in that Z was not employed solely for the purpose of enabling B to transfer B's Y stock without the recognition of gain and was not merely a continuation of X. Z was organized to enable X to be reincorporated in State P. Further, the transfer by B of his Y stock to Z effected the combination of A's and B's former business interests in the form of affiliated corporations.
Rev. Rul. 68-349 is distinguished.