Rev. Rul. 70-224

Advice has been requested whether under the circumstances described below, the acquisition of substantially all of the properties of a corporation qualifies as a reorganization under section 368(a)(1)(C) of the Internal Revenue Code of 1954.

Corporation X owns all of the stock of corporation Y. X proposed to acquire all of the properties of unrelated corporation Z. X and Z entered into a plan of reorganization and agreement that provided X would acquire all of the properties of Z solely in exchange for voting stock of X and X would assume all of the liabilities of Z. Pursuant to the plan, X caused the assets of Z to be transferred directly to Y. X issued its voting stock to Z and assumed the liabilities of Z.

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

Section 368(a)(2)(C) of the Code provides, in pertinent part, that a transaction otherwise qualifying under section 368(a)(1)(C) of the Code will not be disqualified by reason of the fact that part or all of the assets acquired in the transaction are transferred to a corporation controlled by the corporation acquiring such assets.

Revenue Ruling 64-73, C.B. 1964-1 (Part I), 142, holds that a transaction qualifies as a reorganization under section 368(a)(1)(C) of the Code where the acquiring corporation, pursuant to the plan of reorganization, causes some of the assets of the acquired corporation to be transferred directly to the wholly owned subsidiary of a corporation controlled by the acquiring corporation. The remaining assets of the acquired corporation were transferred to the acquiring corporation. The transaction was viewed as an acquisition of substantially all of the properties by the acquiring corporation even though some of the assets were transferred directly to the wholly owned subsidiary of a corporation controlled by the acquiring corporation.

Similarly, it is held that the transaction in the instant case is an acquisition by X, solely in exchange for its voting stock and the assumption of Z's liabilities, of substantially all of the properties of Z, and is, therefore, a reorganization within the meaning of section 368(a)(1)(C) and section 368(a)(2)(C) of the Code. The fact that all the assets of Z were transferred directly to Y rather than through X to Y does not affect the reorganization. The plan of reorganization and agreement between X and Z provided that X would acquire the properties of Z in consideration of X's stock and the assumption by X of Z's liabilities. When the reorganization became effective, X at all times had dominion and control of the Z assets and X is, therefore, regarded as having received the assets and transferred them to Y. Compare Revenue Ruling 70-107, page 78, where the subsidiary corporation directly acquired all of the assets using the stock of its parent corporation where the parent corporation assumed the liabilities.

However, for the definition of acquiring corporation for purposes of section 381 of the Code see section 1.381(a)-1(b)(2) of the Income Tax Regulations.