Rev. Rul. 56-100

The Internal Revenue Service has been requested to reconsider the basis of the stock and assets exchanged in Revenue Ruling 54-96, C.B. 1954-1, 111.

Under the facts presented in Revenue Ruling 54-96, supra, X corporation organized a new corporation Y , transferring part of its assets in exchange for all stock of Y. x thereafter, as part of a prearranged plan, transferred all of the stock of Y to an unrelated corporating, Z , in exchange for which Z issued to X 20 percent of Z's voting stock.

The Service held that the two steps were part of a prearranged, integrated plan and may not be considered independently of each other. Consequently, since X corporation was not in control of the Y corporation after transferring a part of its assets to that corporation, it did not constitute a reorganization as defined in section 112(g)(1) of the Internal Revenue Code of 1939, nor did it constitute a tax-free transfer under section 112(b)(5) of such Code.

At issue are the last two sentences of said Revenue Ruling which read as follows:

The basis of the stock of Y in the hands of Z will be its fair market value at the time it received by Z . The basis to Y corporation of the assets received by Y will be their fair market value at the time of receipt.

The above-quoted statements in Revenue Ruling 54-96, supra , relating to the basis of the Y stock in the hands of Z and the basis of the assets received by Y , are based on the assumption that the three parcels of property involved (the assets transferred to Y , the Y stock, and the Z stock) all have the same fair market value. The quoted statements are not applicable to any case in which this assumption is incorrect.

The Code provides that the basis of assets to a purchaser is his cost, which in this case is the fair market value of stock issued for the assets. Evidence as to the fair market value of the assets received is admissible to show the fair market value of the stock used in making the acquisition, but is of less weight than available direct evidence of the fair market value of such stock. Since the prior ruling may give the impression that evidence as to the fair market value of the assets is cirectly controlling, the last two sentences of Revenue Ruling 54-96, supra , are hereby revised to read as follows:

Under the facts of the instant case the basis to Y of the assets of X received by it and the basis to Z of the Y stock will both be the same as the fair market value of the Z stock received by X .

Revenue Ruling 54-96 is modified accordingly.