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JUN. 13, 1988

Rev. Rul. 88-48; 1988-1 C.B. 117

DATED JUN. 13, 1988
Citations: Rev. Rul. 88-48; 1988-1 C.B. 117

Rev. Rul. 88-48


If a transferor corporation sold 50 percent of its historic assets to unrelated parties for cash and immediately afterwards transferred to an acquiring corporation all of its assets (including the cash from the sale), did the subsequent transfer meet the "substantially all" requirement of section 368(a)(1)(C) of the Internal Revenue Code?


X and Y were unrelated corporations that for many years were engaged in the hardware business. X operated two significant lines of business, a retail hardware business and a wholesale plumbing supply business. Y desired to acquire and continue to operate X's hardware business but did not desire to acquire the other business. Accordingly, pursuant to an overall plan, the following steps were taken. First, in a taxable transaction, X sold its entire interest in the plumbing supply business (constituting 50 percent of its total historic business assets) to purchasers unrelated to either X or Y or their shareholders. Second, X transferred all of its assets, including the cash proceeds from the sale, to Y solely for Y voting stock and the assumption of X's liabilities. Finally, in pursuance of the plan of reorganization, X distributed the Y stock (the sole asset X then held) to the X shareholders in complete liquidation.

Except for the issue relating to the "substantially all" requirement, the transfer of assets form X to Y constituted a corporate reorganization within the meaning of section 368(a)(1)(C) of the Code.


Section 368(a)(1)(C) of the Code defines a corporate reorganization to include the acquisition by one corporation, in exchange solely for all or part of its voting stock, of substantially all the properties of another corporation.

Section 368(a)(1)(C) of the Code is intended to accommodate transactions that are, in effect, mergers, but which fail to meet the statutory requirements that would bring them within section 368(a)(1)(A). See S. Rep. No. 558, 73d Cong., 2d Sees. 16, 17, (1939), 1939-1 C.B. (Pt. 2) 586, 598.

Congress intended that transactions that are divisive in nature not qualify under section 368(a)(1)(C) of the Code, but, instead, be subject to the tests under section 368(a)(1)(D). See S. Rep. No. 1622, 83d Cong., 2d Sess. 274 (1954). The enactment of section 368(a)(2)(G) indicates the continuing interest in furthering this underlying objective of preventing divisive "C" reorganizations.

Rev. Rul. 57-518, 1957-2 C.B. 253, concerns whether, in a "C" reorganization, assets may be retained to pay liabilities. The ruling states that what constitutes "substantially all" for purposes of section 368(a)(1)(C) of the Code depends on the facts and circumstances in each case. Rev. Rul. 57-518 exemplifies the Service's longstanding position that where some assets are transferred to the acquiring corporation and other assets retained, then the transaction may be divisive and so fail to meet the "substantially all" requirement of section 368(a)(1)(C). See also Rev. Rul. 78-47, 1978-1 C.B. 113.

In the present situation, 50 percent of the X assets acquired by Y consisted of cash from the sale of one of X's significant historic businesses. Although Y acquired substantially all the assets X held at the time of transfer, the prior sale prevented Y from acquiring substantially all of X historic business assets. The transaction here at issue, however, was not divisive. The sale proceeds were not retained by the transferor corporation or its shareholders, but were transferred to the acquiring corporation. Moreover, the prior sale of the historic assets was to unrelated purchasers, and the X shareholders retained no interest, direct or indirect, in these assets. Under these circumstance, the "substantially all" requirement of section 368(a)(1)(C) was met because all of the assets of X were transferred to Y.


The transfer of all of its assets by X to Y met the "substantially all" requirement of section 368(a)(1)(C) of the Code, even though immediately prior to the transfer X sold 50 percent of its historic business assets to unrelated parties for cash and transferred that cash to Y instead of the historic assets.


The principal author of this revenue ruling is Richard W. Stern of the Corporation Tax Division. For further information regarding this revenue ruling contact Mr. Stern on (202) 566-3627 (not a toll- free call).

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