Rev. Rul. 71-336

Advice has been requested whether the transaction described below is a taxable exchange.

Since 1960, four unrelated individuals, A, B, C, and D each owned 25 percent of the stock of X corporation. B, C and D each owned ten percent of the stock of Y corporation and A owned seventy percent of the stock of Y. For a number of years, A had unsuccessfully urged B, C and D to have X discontinue one of its businesses.

According to a prearranged plan, B, C, and D contributed their Y stock to X, and shortly thereafter X redeemed all the X stock held by A in exchange for the contributed Y stock in a transaction intended to qualify as a redemption under section 302 of the Internal Revenue Code of 1954. After the transaction, B, C, and D owned all the outstanding stock of X and A owned all the outstanding stock of Y.

In Commissioner v. Court Holding Co., 324 U.S. 331, Ct. D. 1636, C.B. 1945, 58 the Supreme Court of the United States stated that "A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title. To permit the true nature of a transaction to be disguised by mere formalities, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress."

In the instant case, the contribution and redemption was to enable B, C, and D to exchange their Y stock for the X stock of A. X was merely a conduit through which the Y stock passed pursuant to the prearranged plan.

Accordingly, the transaction is a taxable exchange under section 1001 of the Code between B, C, and D on the one hand and A on the other of Y stock for X stock. Thus, gain or loss will be recognized to A, B, C, and D on the exchange.