Rev. Rul. 72-405

Advice has been requested whether the transaction described below qualifies as a reorganization within the meaning of sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of 1954.

Corporation P, whose stock is widely held, is a manufacturing concern organized under the laws of the state of A. Corporation T, whose stock is closely held, is a manufacturing concern organized under the laws of the state of B.

Corporation P wanted to acquire the business operations of corporation T by acquiring all the assets of T subject to its liabilities solely in exchange for P stock. However, T is a party to certain contracts which it would prefer to have pass to P by operation of law pursuant to a statutory merger rather than by assignment. On the other hand, P desired to eliminate the necessity of obtaining the approval of its shareholders for a statutory merger. Consequently the plan of reorganization was consummated as follows:

(a) P organized S corporation, in the state of C, solely for the purpose of participating in the proposed transaction.

(b) S then acquired all of the assets of T subject to its liabilities in a statutory merger under the laws of B and C pursuant to which all of the outstanding stock of T was converted into shares of P stock.

(c) Immediately after the merger of T into S, S was completely liquidated into P.

Thus upon consummation of the plan of reorganization P had acquired all of the assets of T subject to liabilities solely in exchange for voting stock of P.

Section 368(a)(1)(A) of the Code states that the term "reorganization" means a statutory merger or consolidation. Section 368(a)(2)(D) of the Code provides that the acquisition by one corporation, in exchange for stock of a corporation (controlling corporation) which is in control of the acquiring corporation, of substantially all of the properties of another corporation which in the transaction is merged into the acquiring corporation will not disqualify a transaction under section 368(a)(1)(A) if such transaction would have qualified under section 368(a)(1)(A) if the merger had been into the controlling corporation and if no stock of the acquiring corporation is used in the transaction.

Section 368(a)(1)(C) of the Code provides in part that a reorganization is the acquisition by one corporation, in exchange solely for all or a part of its voting stock, of substantially all of the properties of another corporation, but in determining whether the exchange is solely for stock, the assumption by the acquiring corporation of a liability of the other, or the fact that property acquired is subject to a liability, is disregarded.

In Revenue Ruling 67-274, C.B. 1967-2, 141, a corporation (Y), pursuant to a plan of reorganization, acquired all the outstanding stock of corporation X from the shareholders of X in exchange for some of the voting stock of Y and thereafter, as part of the same plan, Y completely liquidated X. Revenue Ruling 67-274 holds that under these circumstances the acquisition of the X stock by Y and the liquidation of X by Y are part of the overall plan of reorganization and the two steps may not be considered independently of each other for Federal income tax purposes. Revenue Ruling 67-274 concludes that the transaction is not a reorganization under section 368(a)(1)(B) of the Code but is an acquisition of the assets of X which is a reorganization described in section 368(a)(1)(C) of the Code.

Under the circumstances of the instant case, the acquisition of T's assets subject to its liabilities by S and the liquidation of S into P are part of an overall plan for P to acquire the assets of T. Therefore, in this transaction the transitory passage of the assets and liabilities of T through S will not be accorded independent significance for Federal income tax purposes.

Accordingly, the merger of T into S will not constitute a reorganization within the meaning of sections 368(a)(1)(A) and 368(a)(2)(D) of the Code followed by a liquidation of S into P but will be considered an acquisition by P of the assets of T solely in exchange for P voting stock in a reorganization described in section 368(a)(1)(C) of the Code.