Rev. Rul. 72-274

Advice has been requested whether certain dividends received by a parent coporation from its subsidiaries under the circumstances described below qualify for the 100 percent dividends received deduction pursuant to section 243(a) of the Internal Revenue Code of 1954.

Corporation P, engaged in the manufacturing business, was the common parent corporation of an affiliated group the membership of which consisted of three subsidiaries of P which were also engaged in the manufacturing business.

In 1969, under a plan of reorganization, P formed a new holding company, H, which in turn formed S, a new subsidiary corporation. Before either H or S had conducted any business, P was merged into S to form the PS corporation, and the shareholders of P exchanged their stock therein for stock of H. After this reorganization was completed pursuant to the requirements of sections 368(a)(1)(A) and 368(a)(2)(D) of the Code, H owned all of the stock of PS, which in turn owned all of the stock of the three other members of the affiliated group (all of which had been first-tier subsidiaries of P before the reorganization).

After the reorganization and not in connection therewith, certain cash dividends were paid by PS to H and by the three subsidiaries of PS to it. Such dividends were paid out of earnings and profits of the distributing corporations which arose before the reorganization but while such corporations were members of the affiliated group before H became the common parent. Section 243(a) of the Code provides, in part, that in the case of a corporation there shall be allowed as a deduction an amount equal to the following percentages of the amounts received as dividends from a domestic corporation: "* * * 100 percent, in the case of qualifying dividends (as defined in subsection (b)(1))."

Section 243(b)(1) of the Code provides that the term "qualifying dividends" means dividends received by a corporation while a member of the same affiliated group of corporations as the distributing corporation provided that such affiliated group has made an election to qualify for the 100 percent dividend received deduction and provided that such dividends are distributed out of earnings and profits of a taxable year of the distributing corporation ending after December 31, 1963, on each day of which the receiving corporation and the distributing corporation were members of the same affiliated group. Section 243(b)(1) of the Code also provides that a multiple surtax exemption election under section 1562 of the Code must not be in effect for the taxable year in which such earnings and profits arose.

Section 1.243-4(a)(5)(i) of the Income Tax Regulations provides, in effect, that for purposes of meeting the requirement that the distributing corporation and the receiving corporation must have been members of the same affiliated group, a mere change in form whereby a new corporation has acquired "substantially all of the outstanding stock" of the former common parent "solely in exchange for stock of such acquiring corporation" will not be considered as giving rise to a different affiliated group.

In the instant case, the transaction was one in which a new common parent was formed and the old common parent was merged into a newly formed subsidiary of the new parent with the shareholders of the old parent exchanging their stock for all of the shares of the new parent corporation.

Since the effect of the transaction described above is the addition of a new common parent, H, this transaction is the practical equivalent of the type of reorganization described in section 1.243-4(a)(5)(i) of the regulations. The requirement contained in section 243(b)(1) of the Code that "qualifying dividends" must be distributed out of earnings and profits of a taxable year of the distributing corporation on each day of which the receiving corporation and the distributing corporation were members of the same affiliated group is not violated by the merger of the old common parent corporation into a subsidiary of a newly formed common parent.

Accordingly, in the instant case the affiliated group in existence before the transaction is considered the same as the affiliated group in existence after the transaction for purposes of meeting the requirements applicable to dividends qualifying for the 100 percent dividends received deduction allowed under section 243(a) of the Code. Therefore, any dividends received by H from PS and by PS from its three subsidiaries under the circumstances presented here are qualifying dividends for purposes of the 100 percent dividends received deduction allowed under section 243(a) of the Code.