Rev. Rul. 56-184

Advice has been requested as to the Federal income tax consequences of an acquisition by one corporation of all the outstanding stock of another corporation under the circumstances described below.

Y corporation is engaged in the business of manufacturing metal products. It has outstanding special preferred participating stock, first and second preferred stock, and common stock. Only the special preferred participating stock is non-voting.

Z corporation desired to control Y corporation inasmuch as the business of the latter complemented Z's light industrial machinery business and geographically fitted its entire system. To that end, Z , pursuant to a plan of reorganization, acquired all of the outstanding stocks of Y by issuing in exchange therefor certain shares of voting common stock of Z . The number of shares of Z stock issued in the exchange was based on the value of Y's assets as of a specified date. The earnings of Y from that date to the date of closing were distributed to the share holders of Y as dividends prior to 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-

*

(B) the acquisition by one corporation, in exchange solely for all or part of its voting stock, of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation * * *.

As to the effect on shareholders in a reorganization, section 354 of the Code reads in part:

(a) GENERAL RULE.-

(1) IN GENERAL.-No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.

The exchanges of the Y stocks solely for voting stock of Z fulfills the requirements of these sections of the Code.

Therefore, the only specific question is whether the receipt of cash dividends by the stockholders of Y corporation is within the purview of section 356 of the Code which provides in part:

(a) GAIN ON EXCHANGES.-

(1) RECOGNITION OF GAIN.-If-

(A) section 354 * * * would apply to an exchange but for the fact that

(B) the property received in the exchange consists not only of property permitted by section 354 * * * 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 such money and the fair market value of such other property.

In the dividend transaction here involved, section 356 of such Code is not applicable because the cash distributed is not cash received in connection with an exchange of stock. If it were, section 368(a)(1)(B) of the Code, quoted above, would not apply because that section is applicable only if voting stock of the acquiring corporation is the sole consideration given for the stock acquired.

Accordingly, no gain or loss is recognized to the shareholders of Y corporation upon the exchange of the stock held by them solely for voting common stock of Z corporation; and the basis of the Z stock acquired by the former shareholders of Y is the same as the basis of Y stock exchanged therefor. The entire amount of the cash distribution by Y to its shareholders is treated as taxable dividends.