Rev. Rul. 57-586

Advice has been requested whether certain certificates of contingent interest distributed in a statutory merger are treated as `stock' within the meaning of section 354(a) of the Internal Revenue Code of 1954 or `other property' within the purview of section 356(a) of the Code.

A corporation and B corporation effected a statutory merger, under the laws of their respective states of incorporation, with A surviving. Pursuant to the merger agreement, stock of B was to be surrendered for newly issued stock of A . However, at the time of the merger, B was engaged in a lawsuit and its liability for past Federal income taxes was undetermined, so that A was unwilling to issue the full amount of stock which it would otherwise issue to the stockholders of B . Instead, A issued x number of shares of common stock and negotiable certificates of contingent interest in units totaling y number of shares representing a contingent interest with respect to a like number of shares of common stock of A to be reserved from shares of common stock that would otherwise have been issued to the stockholders of B at the time of the merger. A is authorized to make deductions from the reserved shares with respect to expense and loss on account of the two situations above-described and to issue to the former B stockholders the remaining reserved shares. At the time of such distribution, each holder of a certificate will, upon surrender of his certificate, receive (a) the number of shares of common stock of A then represented by his certificate and (b) cash equal to the cash dividends that would have been paid on such shares had such shares been issued and distributed on the effective date of the merger. Holders of certificates have no rights, by reason of their ownership thereof, as stockholders of A .

Held: The merger of A and B constitutes a reorganization within the meaning of section 368(a)(1)(A) of the Code. The negotiable certificates of contingent interest received by the stockholders of B at the time of the merger have none of the attributes of corporate stock. Furthermore, cash as well as an indeterminate number of shares of stock will eventually be received for the certificates. Therefore, they are not considered to be stock of A under section 354, but `other property' under section 356 of the Code. Accordingly, gain, if any, realized by the stockholders (measured by the amount by which the fair market value of the stock and certificates received exceeded the cost or other basis of the stock surrendered) is recognized, but in an amount not in excess of the fair market value of the certificates as provided in sections 354(a)(1) and 356(a)(1). Under the provisions of section 356(c), no loss is recognized upon the exchange. The portion of the gain recognized which is not in excess of each stockholder's ratable share of the undistributed earnings and profits of B , available for dividends within the meaning of section 316, is treated as a dividend in the hands of such stockholders as provided in section 356(a)(2). The remainder, if any, of the gain recognized is treated as gain from the exchange of property.