Rev. Rul. 64-73Advice has been requested whether the transaction described below constitutes a reorganization within the meaning of section 368(a) of the Internal Revenue Code of 1954.
L corporation owns 100 percent of the outstanding stock of corporation M. M owns 100 percent of the outstanding stock of corporation N. L entered into an agreement with X , an unrelated corporation, under which L acquired all of the assets of X , solely in exchange for L voting stock. Some of the X assets were transferred from X to N , and the remaining X assets were transferred to L . Neither the assets which were transferred to N nor the assets transferred to L constituted substantially all of X's assets, but together they constituted all of X's assets.
Section 368(a)(1)(C) of the Code provides, in part, that the term reorganization means-
(C) the acquisition by one corporation, in exchange solely for all or a part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), of substantially all of the properties of another corporation * * *.
Prior to the enactment of the 1954 Code, the described transaction would not have qualified as a reorganization, as it was believed that the ultimate lodging of some of the assets in any subsidiary of the acquiring corporation failed to satisfy the continuity-of-interest requirements of the reorganization provisions. See Herman C. Groman v. Commissioner , 302 U.S. 82 (1937), C.T. D. 1285, C.B. 1937-2, 286; and Helvering v. Raymond I. Bashford , 302 U.S. 454 (1938), Ct. D. 1299, C.B. 1938-1, 86.
The Congress, in 1954, modified Groman-Bashford doctrine to provide that the placement of acquired assets in a controlled corporation would no longer destroy the continuity-of-interest requirements of section 368(a)(1)(C) reorganizations. See S. Report No. 1622, Eighty-third Congress, Second Session, at 51-52 and 273, 275.
In applying specific statutory relief to certain factual situations previously governed by the Groman and Bashford cases and section 112(g) of the Internal Revenue Code of 1939 (the predecessor of section 368(a)(1)(C) of the 1954 Code), Congress indicated its desire to remove the continuity-of-interest problem from the section 368(a)(1)(C) reorganization area. Having modified the continuity-of-interest rule where assets move to a corporation directly controlled by the parent in exchange for the parent's stock, there is no sound reason to assume the Congress intended to have the Groman-Bashford rule apply where the assets are caused to be transferred by the parent to a wholly-owned subsidiary of a corporation controlled by the parent corporation.
No cases involving the transfer of some of the acquired assets to remote subsidiaries in attempted section 368(a)(1)(C) reorganizations had arisen prior to the enactment of the 1954 Code. The specific statutory exceptions to the Groman-Bashford doctrine contained in sections 368(a)(1)(C), 368(a)(2)(C), and 368(b) are not intended to exclude a transfer of assets to a wholly-owned subsidiary of a corporation which is controlled by the parent corporation.
However, it should be noted that the Congress in 1954 did not change the definition of a reorganization contained in section 368(a)(1)(B) of the Code so as to modify the continuity-of-interest doctrine in that area. See Revenue Ruling 63-234, C.B. 1963-2, 148.
The described transaction is viewed as an acquisition by L , in exchange solely for part of its voting stock, of substantially all of the properties of X . The fact that in the instant case the plan of reorganization provides that some of the assets are to be transferred directly from X to N , rather than through L and M , does not detract from the conclusion that in substance L is to acquire substantially all the X assets. To hold otherwise would defeat the purpose of the 1954 Code change in the definition of a section 368(a)(1)(C) reorganization. The subsequent transfer of assets acquired in a reorganization under section 368(a)(1)(C) of the 1954 Code to a wholly-owned subsidiary of a corporation controlled by the acquiring corporation, even though pursuant to the plan of reorganization, will not affect the reorganization.
Accordingly, it is held that the transaction described in the instant case constitutes a reorganization as defined in section 368(a)(1)(C) of the Code.