Citations: Rev. Rul. 58-93; 1958-1 C.B. 188
Rev. Rul. 58-93
Advice has been requested as to the tax effect, under section 368 of the Internal Revenue Code of 1954, of certain corporate transactions hereinafter described.
Corporation Y , a corporation organized under the laws of the State of C , was engaged in the small loan business in the State of B . Its outstanding capital stock consisted of 100 x shares of common stock of one class, of which 79 x shares were owned by Corporation X and 21 x shares were owned by various individuals.
Inasmuch as the business of Corporation Y was carried on entirely within the State of B , there were business disadvantages in operating under a corporate charter issued by the State of C . Also, the existence of the large minority interest in Corporation Y had been a handicap to Corporation X in its efforts to raise additional capital through the sale of additional shares of its stock to the public. Therefore, Corporation X desired to eliminate the minority interest and continue the activities of Corporation Y through a wholly-owned subsidiary organized in the State of B .
For the above reasons, a plan of reorganization was adopted under which Corporation Y transferred all of its assets, subject to all of its liabilities, to new Corporation Z (organized under the laws of the State of B ) in exchange for all of the capital stock of Corporation Z . Immediately thereafter, Corporation Y was merged into Corporation X in accordance with the applicable merger statutes of the State of C and the state of incorporation of Corporation X . Pursuant to the merger, the minority shareholders of Corporation Y exchanged their Y stock for stock of Corporation X . The assets of Corporation Y were transferred to Corporation Z prior to the statutory merger (rather than after) for the reason that Corporation X was not licensed to do a small loan business in the State of B and therefore could not directly receive the Y assets.
Section 368(a)(1)(A) of the Internal Revenue Code of 1954, relating to corporate reorganizations, defines a reorganization as `* * * a statutory merger or consolidation * * *.' Section 368(a)(2)(C), containing special rules relating to the definition of the term `reorganization,' provides in part:
(C) Transfers of Assets to Subsidiaries in Certain Paragraph (1)(A) and (1)(C) Cases.-A transaction otherwise qualifying under paragraph (1)(A) statutory merger or paragraph (1)(C) shall not be disqualified by reason of the fact that part or all of the assets which were acquired in the transaction are transferred to a corporation controlled by the corporation acquiring such assets.
Section 368(b) reads as follows:
(b) PARTY TO A REORGANIZATION.-For purposes of this part, the term `a party to a reorganization' includes-
(1) a corporation resulting from a reorganization, and
(2) both corporations, in the case of a reorganization resulting from the acquisition by one corporation of stock or properties of another. In the case of a reorganization qualifying under paragraph (1)(C) of subsection (a), if the stock exchanged for the properties is stock of a corporation which is in control of the acquiring corporation, the term `a party to a reorganization' includes the corporation so controlling the acquiring corporation. under paragraph (1)(A) or (1)(C) under paragraph (1)(A) or (1)nC) of subsection (a) by reason of paragraph (2)(C) of subsection (a), the term `a party to a reorganization' includes the corporation controlling the corporation to which the acquired assets are transferred.
Section 368(a)(2)(C) permits the transfer of assets acquired in a statutory merger to a subsidiary, which may be a new subsidiary. The statute speaks of assets `acquired' so that it seems clear that the transfer contemplated is ordinarily one which occurs after the merger or at the same time as the merger. In the instant case, the transfer to the new subsidiary was required to be made immediately prior to the merger in view of the fact that Corporation X was not permitted under local law to receive the assets for the purpose of conveying them to the new subsidiary after the merger. However, in either case the ultimate effect is practically the same, and it is not believed that the timing of the transfer of the assets to the new subsidiary (under the facts of the instant case) should disqualify the reorganization. It is therefore the position of the Internal Revenue Service that the transaction should be treated for Federal income tax purposes as though Corporation Y had been merged into Corporation X and thereafter Corporation X had transferred the Y assets to the new subsidiary, Corporation Z . See Revenue Ruling 57-278, C.B. 1957-1, 124, where a similar result was achieved in a case involving similar facts in a reorganization qualifying under section 368(a)(1)(C).
In view of the foregoing, it is held that the transaction in the instant case constitutes a reorganization under the provisions of sections 368(a)(1)(A) and 368(a)(2)(C) of the Internal Revenue Code of 1954. No gain or loss is recognized to Corporation X , Corporation Y , or Corporation Z as a result of the exchanges made pursuant to the plan of reorganization. As provided by section 354(a)(1) of the Code, no gain or loss is recognized to the minority shareholders of Corporation Y upon the exchange of their stock for stock of Corporation X . Under section 368, the basis of the Corporation X stock in the hands of the minority shareholders of Corporation Y is the same as the basis of the Corporation Y stock exchanged therefor and, under section 362(b), the basis of the assets of Corporation Y acquired by Corporation Z is the same in the hands of Corporation Z as it was in the hands of Corporation Y . In accordance with section 381(c)(2) of the Code, the earnings and profits of Corporation Y are deemed to have been received by Corporation Z as of the date on which the assets of Corporation Y were transferred to Corporation Z .