Rev. Rul. 63-29

Advice has been requested whether the transaction described below qualifies as a reorganization under section 368(a)(1)(C) of the Internal Revenue Code of 1954.

M corporation and N corporation were respectively engaged in the manufacture of children's toys and in the distribution of steel and allied products. At some time in the past, M corporation sold a substantial part of its operating assets for cash and notes to a third party and more recently sold all but a small part of the remaining operating assets for cash, also to a third party. Thereafter, for valid business reasons, it acquired all of the property of N corporation solely in exchange for its voting stock. N corporation distributed the M stock received to its shareholders and then dissolved. M corporation used the assets resulting from the sale of its operating assets to expand the operations of the steel distributing business acquired from N corporation.

Section 368(a)(1)(C) of the Code states that the term "reorganization" means the acquisition by one corporation, in exchange solely for all or part of its voting stock, of substantially all the properties of another corporation.

Section 1.368-1(b) of the Income Tax Regulations specifies that a reorganization, to satisfy the requirements of the Code, must result in a continuity of the business enterprise under modified corporate form. This requirement will not be satisfied unless the surviving corporation is organized to engage in a business enterprise. See, for example, Standard Realization Company v. Commissioner, 10 T.C. 708(1948), acquiescence, C.B. 1948-2, 3. However, the surviving corporation need not continue the activities conducted by its predecessors. See Donald L. Bentsen et al. v. Phinney, 199 Fed. Supp. 363(1961); and Ernest F. Becher v. Commissioner, 221 Fed. (2d) 252 (1955). See also Pebble Springs Distilling Co. v. Commissioner, 231 Fed. (2d) 288(1956), certiorari denied, 352 U.S. 836 (1956); WAGE, Inc. v. Commissioner, 19 T.C. 249 (1952); and Morley Cypress Trust, Schedule "B" et al. v. Commissioner, 3 T.C. 84, (1944), Acquiescence, C.B. 1944, 20.

Since M corporation engaged in the steel distribution business after the merger, the requirement that the reorganization result in a continuity of the business enterprise within the meaning of section 1.368-1(b) of the regulations was satisfied in the instant case, even though the toy business formerly conducted by M corporation was discontinued.

Accordingly, it is held that the acquisition by M corporation of all of the properties of N corporation solely in exchange for its voting stock constitutes a reorganization as defined in section 368(a)(1)(C) of the Code.

In view of these conclusions, reconsideration has been given to Revenue Ruling 56-330, C.B. 1956-2, 204, which held, in part, that the required continuity of the business enterprise was lacking where the successor corporation in a transaction otherwise qualifying as a reorganization engaged in a new business enterprise entirely different from that conducted by its predecessors. The conclusions reached in the instant case are equally applicable to the question involved in Revenue Ruling 56-330.

Accordingly, Revenue Ruling 56-330 is revoked.