Rev. Rul. 57-32

Advice has been requested whether the X corporation would be entitled to a refund of the employer tax paid with respect to wages paid to an employee prior to its merger with the Y corporation under the circumstances described below, in view of the provisions of section 3121(a)(1) of the Federal Insurance Contributions Act (chapter 21, subtitle C, Internal Revenue Code of 1954), relating to predecessor-successor employers.

On October 1, 1955, the X corporation purchased all of the outstanding capital stock of the Y corporation. Thereupon, the Y corporation was merged with and became a branch of the X corporation. The X corporation retained its corporate existence. All the employees of the Y corporation were immediately transferred to the payroll of the X corporation. One of the employees involved in the transfer, hereinafter referred to as C , had also performed services for the X corporation during the same calendar year and prior to the merger. At the time of the merger, each corporation had paid employer tax of $84 with respect to C's wages. The corporations qualify as predecessor-successor employers within the contemplation of section 3121(a)(1), supra .

Under the provisions of section 3121(a)(1), a successor employer may combine the wages paid to an employee by a predecessor employer with the wages paid by it to the same employee during the calendar year in applying the $4,200 limitation on wages prescribed by such section. It is the position of the Internal Revenue Service that the relief afforded successor employers by that section from the multiple payment of taxes in those cases where the same employees are continued in service following a consolidation or merger of two or more employers is prospective rather than retrospective, that is, such relief will extend only to remuneration for employment paid by a successor employer for services performed subsequent to a merger or consolidation. Prior to the merger in the instant case, the employers were separate and distinct employing entities. An employee who performed services for both corporations prior to the merger is considered to have been engaged in multiple employment for purposes of the employee tax special refund provisions of section 6413(c)(1) of the Code.

However, there is no provision under the law or regulations whereby an employer may obtain a refund of any portion of the employer tax which attaches to the first $4,200 of remuneration paid by an employer to an employee during the calendar year except as contemplated by section 3121(a)(1) in the case of wages paid by a successor employer subsequent to the merger or consolidation. See Rev. Rul. 55-584, C.B. 1955-2, 394. Since the X corporation and the Y corporation, as separate and distinct employing entities prior to the merger, were each liable for the taxes imposed under the Act with respect to the first $4,200 of wages which each paid to C with respect to services performed prior to the merger, no portion of the employer tax paid by each corporation with respect to such wages in refundable to either corporation.

To the extent that Revenue Ruling 55-584, supra , may be construed to extend the benefits of section 3121(a)(1) of the Code to all cases involving predecessor and successor employers irrespective of whether the wage payments were made prior to or subsequent to the merger or consolidation, it is hereby modified.