Rev. Rul. 73-102

Advice has been requested whether, under the circumstances described below, the "solely for voting stock" requirement of section 368(a)(1)(C) of the Internal Revenue Code is satisfied.

For valid business reasons, X corporation entered into a plan of reorganization with unrelated Y corporation. Pursuant to the plan, X transferred all of its assets to Y in exchange for Y voting stock and the assumption by Y of the X liabilities, including liabilities to pay claims of dissenting shareholders.

Under the plan, Y paid 50x dollars to dissenting X shareholders in satisfaction of their claims, based on the fair market value of their X stock surrendered. The dissenting shareholders surrendered all their X stock for cash in the transaction. The fair market value of the gross assets transferred by X to Y was 2,000x dollars. The amount of the liabilities assumed by Y (other than the liability to pay dissenting shareholders) was 150x dollars.

Section 368(a)(1)(C) of the Code defines as a reorganization the acquisition by one corporation, in exchange solely for shares of its voting stock, of substantially all the properties of another corporation. Section 368(a)(1)(C) of the Code further provides that in determining whether the exchange is solely for stock the assumption by the acquiring corporation of a liability of the other will be disregarded.

Section 368(a)(2)(B) of the Code provides that if, in addition to voting stock, the acquiring corporation exchanges money or other property, and if the acquiring corporation acquires, solely for voting stock, property of the other corporation having a fair market value which is at least 80 percent of the fair market value of all the property of the other corporation, then such acquisition will be treated as qualifying under section 368(a)(1)(C) of the Code. For the purpose of the percentage computation of section 368(a)(2)(B) of the Code, liabilities assumed by the acquiring corporation are treated as money.

In Helvering v. Southwest Consolidated Corp., 315 U.S. 194 (1942), Ct. D. 1544, 1942-1 C.B. 215, the Supreme Court of the United States held that the "solely for voting stock" requirement of the predecessor of section 368(a)(1)(C) of the Code was violated where the acquiring corporation directly or indirectly transferred to the acquired corporation or its shareholders property other than voting stock in exchange for the equity interest being acquired. The Court stated: "'Solely' leaves no leeway."

The payment by Y of 50x dollars to dissenting shareholders of X in satisfaction of their claims was, in substance, the same as if Y had exchanged cash plus voting stock for the properties of X. Therefore, this cash payment is not a payment by Y of an assumed liability, but is additional consideration paid by Y in the exchange for the properties acquired by Y. Thus, the acquisition of the X property for the Y voting stock and cash cannot qualify under section 368(a)(1)(C) of the Code unless section 368(a)(2)(B) of the Code applies.

For purposes of section 368(a)(2)(B) of the Code, Y constructively paid a total of 200x dollars in money to X (liabilities assumed in the amount of 150x dollars, plus 50x dollars paid to the dissenting shareholders). Therefore, Y received property of X having a fair market value of 1,800x dollars (gross assets in the amount of 2,000x dollars, less 200x dollars in money constructively paid to X) solely for voting stock of Y, which represents 90 percent of the fair market value of all of the X property.

Accordingly, in the instant case, since at least 80 percent of all the property of X was acquired solely for voting stock of Y, it is held that the transaction qualifies as a reorganization under sections 368(a)(1)(C) and (a)(2)(B) of the Code. Under section 361(b)(1)(A) of the Code, no gain is recognized to X upon the constructive receipt and distribution of 50x dollars to the dissenting shareholders. Under section 361(b)(2) of the Code, no loss is recognized to X. The cash received by the dissenting shareholders will be treated as a constructive distribution to them by X in redemption of their X stock subject to the provisions and limitations of section 302 of the Code.