Rev. Rul. 70-240

Advice has been requested whether the amount distributed to the shareholder in the transaction described below is a distribution in liquidation of a corporation to which section 331 of the Internal Revenue Code of 1954 applies or whether such amount is a distribution that is taxable to the shareholder as provided in section 356(a) of the Code as other property received in an exchange to which section 368(a)(1) of the Code applies.

B owned all the stock of both the X corporation and the Y corporation each of which had been engaged in business for many years. X sold its operating assets to Y for 34x dollars (their fair market value). The remaining assets of X, which had a fair market value of 33x dollars, consisted generally of cash, accounts receivable, and investments in stocks and bonds. Following this sale, X paid its debts, which amounted to 38x dollars, and liquidated. B received in exchange for his X stock (2x dollar basis), a liquidating distribution of 29x dollars. Y continued to operate the business formerly conducted by X, in addition to its own existing business.

Section 331 of the Code provides that amounts distributed in complete liquidation of a corporation will be treated as in full payment in exchange for the stock.

Section 1.331-1(c) of the Income Tax Regulations provides that a liquidation which is followed by a transfer to another corporation of all or part of the assets of the liquidating corporation or which is preceded by such a transfer may, however, have the effect of the distribution of a dividend or of a transaction in which no loss is recognized and gain is recognized only to the extent of "other property."

Section 368(a)(1)(D) of the Code provides that a reorganization includes a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders * * * is in control of the corporation to which the assets are transferred; but only if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354, 355, or 356 of the Code.

In the instant case, although no actual shares of the stock of Y were distributed to B as a result of the transaction, B is treated as having received Y stock since he already owned all the stock of Y. See Commissioner v. Walter L. and Helen Morgan, 288 F. 2d 676 (1961), certiorari denied 368 U.S. 836 (1961) and Ralph C. Wilson, Sr. v. Commissioner, 46 T.C. 334 (1966).

Section 354(a)(1) of the Code provides that no gain or loss will be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.

Section 354(b)(1) of the Code states, in part, that the receipt of stock in an exchange pursuant to a reorganization within the meaning of section 368(a)(1)(D) of the Code does not give rise to gain or loss where the corporation to which the assets are transferred acquires substantially all of the properties of the transferor. Revenue Ruling 57-518, C.B. 1957-2, 253, holds that "substantially all of the properties" depends upon the facts and circumstances in each case rather than upon any particular percentage. See John G. Moffatt, et al. v. Commissioner, 42 T.C. 558 (1964), 363 F. 2d 262 (1966) certiorari denied 386 U.S. 1016 (1967).

Under section 356(a)(2) of the Code, a distribution pursuant to a reorganization is taxable as a dividend from the distributing corporation to the extent of each shareholder's "ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913." Where, as here, there is complete shareholder identity both corporations will be considered "distributing" corporations, for purposes of determining whether a distribution has the effect of a dividend. See J. E. Davant, et al. v. Commissioner 366 F. 2d 874 (1966), certiorari denied 386 U.S. 1022 (1967).

Accordingly, the transfer by X of its operating assets to Y will be regarded as the acquisition by Y of substantially all the properties of X. Therefore, it is held that the transaction is a reorganization as defined in section 368(a)(1)(D) of the Code. B will be treated as receiving Y stock in exchange for his stock of X plus a cash distribution of 29x dollars. The gain realized by B on the exchange is recognized under section 356(a)(1) of the Code to the extent of the cash received and is treated as a dividend (as defined in section 316 of the Code) under section 356(a)(2) of the Code to the extent of the combined earnings and profits of X and Y.