Rev. Rul. 57-190

A certain corporation has been engaged under a dealer franchise in the sale and service of brand X automobiles since 1946. For over five years prior to 1954, these operations has been carried on in two buildings ( B and C ) which the corporation owned and which were located some distance apart in the same city. In 1954 the corporation acquired a franchise for the sale and service of brand Y automobiles and purchased the inventories, equipment, and leasehold of a former brand Y dealer who had been operating in a building adjoining the corporation's building B . Shortly thereafter, the inventories of brand X automobiles and certain shop equipment located in building B were moved to building C , and from that time all brand X sales and service operations have been conducted from the location in building C . At the same time a portion of the activities of the new dealership were moved into building B , and thereafter building B , together with the adjoining leased building, has been used for connection with the brand Y sales and service operations. In 1956 and for bona fide business reasons, the corporation transferred all of the assets (including building C ) and liabilities of the brand X business to a new corporation in exchange for the stock of the new corporation, and distributed such stock pro rata to its stockholders. It is contended that, since the corporation had been engaged in the sales and servicing of automobiles in two locations for more than five years, the activities at the two locations constituted separate busineses conducted for over five years. Held , no gain or loss is recognized to the corporation as a result of the transfer of a portion of its properties to the new corporation in exchange for the stock of the latter, in view of the provisions of section 351 of the Internal Revenue Code of 1954. However, the distribution of the stock of the new corporation is not within the purview of the non-taxable provisions of section 355 of the Code. The activities of the brand X business, which formerly were conducted at two locations, were amalgamated into one integrated business in 1954 when the inventories of brand X automobiles located in building B and the shop equipment theretofore used in the X business at that location were moved to building C . This business, which was the one transferred to the new corporation, had been actively conducted throughout the five-year period ending on the date of the distribution of the stock of the new corporation. However, the brand Y business retained by the corporation had not been actively conducted by the corporation for five years within the meaning of section 355(b) of the Code, inasmuch as the brand Y franchise, inventories, equipment, and leasehold were not acquired until 1954. Therefore, the active business requirements of section 355(b) are not met, and the distributions of the stock of the new corporation constitutes a distribution of property to which section 301 applies.