Rev. Rul. 58-422

Rev. Rul. 58-422

Advice has been requested regarding the applicability of Revenue Ruling 57-276, C.B. 1957-1, 126, to a transaction in which a new corporation (formed by its former parent in a different state) acquired all the assets of the parent and its two wholly-owned subsidiaries by way of a statutory merger under section 368(a)(1)(A) of the Internal Revenue Code of 1954.

Revenue Ruling 57-276, supra , holds, in part, that, if an existing corporation reincorporates under the law of a state other than that of the original incorporation and then merges into its newly organized corporation under applicable merger statutes of the states concerned, the transaction comes within the reorganization provisions of section 368(a)(1)(F) of the Code, notwithstanding the fact that such reorganization also qualifies under another provision of section 268(a)(1) of the Code. Therefore, under section 381(b) of the Code, relating to carryovers in certain corporate acquisitions, that part of the taxable year before the reorganization and that part of the taxable year after the reorganization constitute a single taxable year of the acquiring corporation. The transferor corporation is not required to file an income tax return for any portion of the taxable year involved since all income and deductions for all of that year are includible in the return of the acquiring corporation.

In the instant case, a corporation desired, for valid business purposes, to reincorporate in a state other than the state of its incorporation and to acquire and operate directly the assets and businesses of its two wholly-owned subsidiaries. To carry out these purposes, the corporation organized a new corporation under the laws of the desired other state, and the new corporation, the parent, and the two subsidiaries entered into an agreement of statutory merger under which the new corporation was to be the surviving corporation. On the effective date of the merger, the new corporation succeeded to and became the owner of all of the assets of, and assumed all of the liabilities of, the parent and the two subsidiaries, and the separate existence of the three old corporations thereupon ceased. The new corporation issued shares of its common stock, share for share, to the stockholders of the parent in exchange for their shares of common stock of the parent (the only stock of the parent outstanding). The stock of the two subsidiaries was surrendered and cancelled.

It is the opinion of the Internal Revenue Service that the liquidations of the two subsidiaries in pursuance of the merger agreement are liquidations to which section 332 of the Code applies. However, a question is raised whether the merger, under the circumstances, effects a mere change in place of organization of the parent, within the meaning of section 368(a)(1)(F) of the Code, thereby bringing it within the applicability of Revenue Ruling 57-276, supra .

Revenue Ruling 57-276, supra , is applicable in all cases where there is no change in the existing stockholders or change in the assets of the corporations involved. In the instant case, the fact that th subsidiaries of the former parent were liquidated at the same time that the said parent reincorporated in a different state did not constitute a change in the stockholders or assets of the merged corporation. The stockholders of the former parent had the same equity in the surviving corporation that they had in the three old corporations, inasmuch as all of the assets of the three transferor corporations were held by the surviving corporation. In this connection, had the subsidiaries liquidated under the nontaxable provisions of section 332 of the Code before the merger and, subsequently, the parent reincorporated in a different state, the latter transaction would have been considered a reorganization coming within the provisions of section 368(a)(1)(F) of the Code. The fact that the two transactions were consummated simultaneously does not change the above conclusion.

In view of the foregoing, it is held that the transaction in the instant case, insofar as it relates to the transfer of the assets and liabilities of the parent to the new corporation, constitutes a reorganization within the meaning of section 368(a)(1)(F) of the Code (even though it also qualifies under section 368(a)(1)(A)), notwithstanding the fact that the two subsidiaries of the parent were also parties to the merger agreement. Therefore, pursuant to the provisions of section 381(b) of the Code, the former parent corporation is not required to file an income tax return for any portion of the taxable year prior to the effective date of the reorganization, but that portion of the taxable year prior to the effective date of the reorganization and that portion of the taxable year after such effective date constitute a single taxable year of the new corporation. However, the two subsidiaries are required to file returns for the taxable year which ends on the effective date of the merger in which their separate corporate existence is terminated.