Rev. Rul. 76-54

Rev. Rul. 76-54

Advice has been requested as to a proper interpretation of the method of the acquisition of the stock of Y corporation as set forth in the facts stated in Rev. Rul. 73-44, 1973-1 C.B. 182.

Rev. Rul. 73-44 states that X corporation, prior to May 20, 1969, was engaged in various business enterprises, one of which was a "newspaper publication, operated as a wholly owned subsidiary, Y, which was acquired within the preceding five-year period in a transaction in which gain was recognized." Rev. Rul. 73-44 goes on to hold, in part, that Y satisfies the active trade or business requirement of section 355(b) of the Internal Revenue Code of 1954 by reason of the transfer to it of a glass container business formerly conducted by its parent corporation X.

A question has been raised whether Rev. Rul. 73-44 should be interpreted to mean that X acquired the Y stock in a transaction in which gain was recognized at a time when Y was conducting the newspaper business or that X acquired the newspaper business in a transaction in which gain was recognized and later transferred the business to Y.

In defining an active trade or business under section 355(b)(1) of the Code, section 355(b)(2) provides, in relevant part, that a corporation shall be treated as engaged in the active conduct of a trade or business if and only if (A) it is engaged in the active conduct of a trade or business, (B) such trade or business has been actively conducted throughout the 5-year period ending on the date of the distribution, (C) such trade or business was not acquired within the 5-year period ending on the date of the distribution in a transaction in which gain or loss was recognized in whole or in part and (D) control of a corporation which (at the time of acquisition of control) was conducting such trade or business was not acquired directly by another corporation within the 5-year period ending on the date of the distribution.

As explained in Rev. Rul. 73-44, Y qualified as a corporation engaged in the active conduct of a trade or business as defined in section 355(b)(2) of the Code only because of its conduct of the glass container business. X qualified only by reason of its conduct of the tin container business. Both of these businesses business had been actively conducted for more than five years. Neither business was acquired by X or Y within the 5-year period preceding the date of distribution in a transaction in which gain or loss was recognized nor was control of a corporation which (at the time of acquisition of control) was conducting either business acquired within the 5-year period by another corporation.

Section 355(a)(3) of the Code states that, for purposes of section 355 and 356 stock of a controlled corporation acquired by the distributing corporation by reason of any transaction which occurs within 5 years of the distribution of such stock and in which gain or loss was recognized in whole or in part, shall not be treated as stock of such controlled corporation, but as other property.

Therefore, Rev. Rul. 73-44 should be interpreted to mean that the newspaper business, operated by Y, a wholly owned subsidiary of X, was acquired by X within the 5-year period preceding the date of distribution in a transaction in which gain was recognized and then transferred to Y in exchange for Y stock in a transaction in which gain or loss was not recognized.

Rev. Rul. 73-44 is clarified.