Rev. Rul. 74-36

Advice has been requested concerning the tax treatment of cash received by shareholders in lieu of fractional shares of stock in a reorganization defined in section 368(a)(1)(F) of the Internal Revenue Code of 1954.

Rev. Rul. 66-365, 1966-2 C.B. 116, holds that the "solely for voting stock" requirement contained in sections 368(a)(1)(B) and (C) of the Code will not be violated where a cash payment made by the acquiring corporation to the shareholders of the acquired corporation is in lieu of fractional interests and represents a mere mechanical rounding off of the fractions in the exchange rather than separately bargained-for consideration. That Revenue Ruling also holds that, in a transaction qualifying under section 368(a)(1)(A), (C) (by reason of section 368(a)(2)(B)), or (D), if the cash paid by the acquiring corporation represents separately bargained-for consideration it will be treated as the receipt of "boot" under sections 356(a) and 361(b).

In addition, Rev. Rul. 66-365 holds that where such a cash payment is in lieu of fractional interests and is not in the nature of bargained-for consideration, it will be treated as a distribution in full payment in exchange for the fractional share under section 302(a) of the Code provided the payment is not essentially equivalent to a dividend.

Rev. Rul. 69-34, 1969-1 C.B. 105, extended the application of Rev. Rul. 66-365 to cash payments accompanying a reorganization qualifying under section 368(a)(1)(E) of the Code relating to recapitalizations.

The tests set forth in Rev. Rul. 66-365 (namely, where the cash paid represents merely a mechanical rounding off of the fractions in the exchange, and is not a separately bargained-for consideration) will also be applied to cash payments accompanying a reorganization qualifying under section 368(a)(1)(F) of the Code relating to a mere change in identity, form, or place of organization. If these criteria are satisfied, the cash payments will be tested under section 302 of the Code relating to distributions in redemption of stock. However, if these criteria are not satisfied, the cash payments will be treated either as the receipt of "boot" under section 356(a) or as distributions to which section 301 applies, depending upon all the facts and circumstances involved. See section 1.301-1(1) of the Income Tax Regulations.