Rev. Rul. 71-364

Advice has been requested as to how the distribution of the excess amount of cash, which remains after the payment of dissolution expenses, by an acquired corporation, pursuant to a reorganization within the meaning of section 368(a)(1)(C) of the Internal Revenue Code of 1954, will be treated under the circumstances of the two situations described below.

Pursuant to the plan of reorganization, X corporation acquired substantially all of the assets of unrelated Y corporation, subject to its liabilities, solely in exchange for voting common stock of X in a transaction which qualified as a reorganization within the meaning of section 368(a)(1)(C) of the Code. Y corporation retained only an amount of cash to pay its dissolution expenses and distributed all of the X stock to its shareholders, as of the date of transfer, in exchange for all of their Y stock.

In the first situation, the plan of reorganization provided that any excess cash which remained in the hands of Y, after the payment of all dissolution expenses, would be distributed pro rata to the former shareholders of Y who were shareholders as of the date of the adoption of the plan of reorganization. Y distributed this excess cash to its former shareholders pro rata approximately one year after the date of transfer.

In the second situation, the plan of reorganization provided that any excess cash which remained in the hands of Y, after the payment of all dissolution expenses, would be transferred to X. Y transferred the excess cash to X approximately one year after the date of transfer.

Section 354(a)(1) of the Code provides in part, that no gain or loss will be recognized if stock in a corporation a party to a reorganization is exchanged solely for stock in another corporation a party to a reorganization.

Section 356(a)(1) of the Code provides, in part, that if section 354 of the Code would apply to an exchange but for the fact that the property received in exchange consists not only of property permitted by section 354 of the Code to be received without the recognition of gain but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of the money and the fair market value of the other property. Section 356(a)(2) of the Code provides, in part, that if the exchange has the effect of the distribution of a dividend, then the gain recognized under section 356(a)(1) of the Code will be treated as a dividend to the extent of each distributee's ratable share of the undistributed earnings and profits of the corporation making the distribution.

Section 1.381(c)(2)-1(c)(1) of the Income Tax Regulations provides that if, in a reorganization to which section 381(a)(2) of the Code applies, the transferor corporation pursuant to the plan of reorganization distributes to its stockholders property consisting not only of property permitted by section 354 to be received without recognition of gain, but also of other property or money, then the accumulated earnings and profits of the transferor corporation as of the close of the date of transfer shall be computed by taking into account the amount of earnings and profits properly applicable to the distribution, regardless of whether such distribution occurs before or after the close of the date of transfer.

Section 361(a) of the Code provides, in part, that no gain or loss is recognized to a corporation, a party to a reorganization, which exchanges its property solely for stock of an acquiring corporation.

Section 1032(a) provides, in part, that no gain or loss is recognized to a corporation on the receipt of money or other property in exchange for its stock.

In the first situation, since the shareholders of Y received the cash distribution as part of the plan of reorganization, each shareholder of Y will be treated as receiving from Y, X stock in exchange for his Y stock plus a pro rata cash distribution from Y. Accordingly, the gain realized by each shareholder of Y on the exchange is recognized under section 356(a)(1) of the Code to the extent of the cash received and is treated as a dividend under section 356(a)(2) of the Code to the extent of the earnings and profits of Y properly applicable to the distribution as provided in section 1.381(c)(2)-1(c)(1) of the regulations.

In the second situation, no gain or loss is recognized to X pursuant to section 1032(a) of the Code upon the receipt by X of the excess cash.