Rev. Rul. 70-223: IRS respects TP's choice of downstream A over § 332

In Rev. Rul. 70-223, the IRS rules that a taxpayer may accomplish its desired objective of combining two businesses by either a liquidation or downstream merger. The IRS respected the taxpayer's choice to undertake a downstream statutory merger pursuant to § 368(a)(1)(A).
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Citations: Rev. Rul. 70-223; 1970-1 C.B. 79

Rev. Rul. 70-223Advice has been requested whether the transaction described below is a reorganization within the definition of section 368(a)(1)(A) of the Internal Revenue Code of 1954.

Corporation X purchased all of the outstanding stock of corporation Y within a 12-month period. Within two years of the last stock purchase X was merged into Y. Y's assets had an adjusted basis to Y greater than the cost of the Y stock to X. Some of these assets, if disposed of, by sale or by liquidation would be subject to the provisions of sections 47, 1245, and 1250 of the Code.

There are good business reasons for combining the businesses of X and Y. In this case it was decided to merge X into Y rather than liquidate Y in order to obtain the more favorable tax treatment afforded by the reorganization provisions of the Code.

Section 368(a)(1)(A) of the Code defines a statutory merger or consolidation as a reorganization. Section 362 of the Code provides that the basis of property acquired by a corporation in connection with a reorganization, will be the same as the basis in the hands of the transferor.

Since X may accomplish its desired objective of combining the two businesses by either liquidating Y or by merging into Y, it may choose whichever form it desires for the transaction.

Accordingly, it is held that the merger of X into Y is a reorganization within the meaning of section 368(a)(1)(A) of the Code provided it complies with the laws of the states of incorporation of X and Y.

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