Rev. Rul. 55-440

Advice has been requested with respect to the tax consequences of a reorganization under the following circumstances.

Pursuant to a plan of reorganization, the X corporation acquired not less than 80 percent of the outstanding common stock of the Y corporation in exchange solely for voting common stock of X . The offer of exchange by X corporation was contingent upon its acceptance by the holders of at least 80 percent of the outstanding common stock of Y corporation.

Y corporation also has voting preferred stock outstanding. The certificate of incorporation provides, in part, that the preferred stock may be called at a specified price per share, plus accrued dividends, on any dividend date upon 30 days' notice to the stockholders of Y's intention to redeem the stock. Prior to the effective date of the exchange, the board of directors of Y resolved to call the preferred stock and the 30 days' notices of the call were mailed to the holders of the preferred stock. The redemption price of all the outstanding preferred stock was deposited with a bank as escrow agent.

After the exchange of common stock was consummated upon the tender of at least 80 percent of the common stock of Y corporation, all of the preferred stock of Y had had been previously called, but there were certain shares of the preferred stock which had not been presented for redemption prior to the effective date of the exchange.

Section 368 of the Internal Revenue Code of 1954 provides, in part, as follows:

(a) REORGANIZATION.-

(1) IN GENERAL.-* * * the term `reorganization' means-

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(B) the acquisition by one corporation, in exchange solely for all or a part of its voting stock, of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation (whether or not such acquiring corporation had control immediately before the acquisition);

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(c) CONTROL.-* * * the term `control' means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation.

The question at issue is whether preferred shares previously called for redemption but not yet surrendered at the effective date of the exchange would be considered to be `stock' within the meaning of section 368(c) of the Code for the purpose of determining whether the X corporation was in control of Y corporation after the exchange of common stock within the meaning of section 368(a)(1)(B) of the Code.

Under the terms of the preferred stock indenture pursuant to the certificate of incorporation, the Y corporation may call for redemption on any dividend date upon 30 days' notice to its stockholders to redeem such stock. Therefore, the rights as preferred stockholders terminated upon the call of the preferred shares. Thereafter, the holders of such shares had only the right to receive the call price upon the surrender of the shares for redemption, there being no issue regarding the rights of creditors. For the purpose of determining control under section 368(c), preferred shares which have been called but not yet presented for redemption will be disregarded.

In view of the foregoing, the acquisition by X corporation in exchange solely for shares of its voting common stock of at least 80 percent of the outstanding common stock of Y corporation constitutes a reorganization within the meaning of section 368(a)(1)(B) of the Code, regardless of the number of shares of preferred stock of Y corporation which, at the time of the consummation of the exchange, had not been presented for redemption. Accordingly, no gain or loss is recognizable to the common stockholders of Y as a result of the exchange of their common stock of Y for common stock of X . The basis in their hands of the common stock of X received upon the exchange is the same as the basis of the common stock of Y exchanged therefor