Rev. Rul. 67-192

Advice has been requested as to the extent to which gain will be recognized on the transfer of property by a domestic corporation to its wholly owned foreign subsidiary under the circumstances presented below.

X , a domestic corporation, transferred an automobile and a piece of machinery used in its business and 1000 shares of stock of foreign corporation Y to Z , a wholly owned foreign subsidiary operating a business in Canada in exchange for additional Z stock. The automobile had a market value in excess of its adjusted basis for Federal income tax purposes, but the value of the machinery was less than its adjusted basis. The shares of Y had been purchased by X on several occasions. As a result, X's basis in some of the Y stock was greater than the fair market value of the Y stock, and X's basis in the remainder of the Y stock was less than its fair market value. Prior to the exchange, X had not, pursuant to section 367 of the Internal Revenue Code of 1954, established to the satisfaction of the Commissioner that the exchange was not in pursuant of a plan having as one of its principal purposes the avoidance of Federal income taxes.

Under section 351 of the Code no gain or loss is recognized if property is transferred to a corporation in exchange for its stock if immediately after the exchange the transferor is in control of the corporation.

Under section 367 of the Code, however, the nonrecognition provisions of section 351 of the Code are not applicable to the gains where a taxpayer has not established to the satisfaction of the Commissioner that the exchange was not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax. Consequently, the realized gain on the transfer of the property from X to Z is recognized.

In determining the amount of gain to be recognized, each item of property transferred is considered to have been separately exchanged. See Aaron F. Williams v. McGowan , 152 F.2d 570 (1945) and United States Holding Co. , 44 T.C. 323 (1965), acquiescence C.B. 1966-2, 7. The principle has been adopted in analogous cases decided under the predecessor of section 267 of the Code dealing with the nonrecognition of loss in the case of a sale between related parties. See, e.g., Morris Investment Corporation v. Commissioner , 156 F.2d 748 (1946), certiorari denied, 329 U.S. 788 (1946) where the separate sale or exchange principle was applied to a transaction involving shares of stock in the same corporation upon which both gain and loss were realized.

Accordingly, in determining the amount of gain recognized, each item of property transferred in the above-described transaction is to be treated as the subject of a separate exchange. Thus, the realized gain on the transfer of the automobile and the appreciated shares of Y stock is to be recognized without regard to section 351 of the Code.

Since section 367 of the Code applies only to those transactions upon which gain is realized, the loss realized on the exchange of those shares of Y stock which have a basis greater than their fair market value and the loss realized on the exchange of machinery will not be recognized under the provisions of section 351 of the Code.