Rev. Rul. 78-130

Rev. Rul. 78-130

Advice has been requested whether the transaction described below qualifies as a reorganization within the meaning of section 368(a)(1)(C) of the Internal Revenue Code of 1954.

P, a domestic corporation, owns all of the stock of S-1 and S-2, both of which are incorporated in foreign country R. S-1 is an operating company. S-2 is a holding company that owns all of the stock of corporations X, Y, and Z, which are also incorporated in foreign country R.

In a proposed transaction that the Commissioner of Internal Revenue has determined is not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income taxes within the meaning of section 367 of the Code, all of the operating companies in country R are to be combined into a new subsidiary of S-2 to be formed in country R in accordance with the following plan:

(a) S-2 will organize N corporation, in foreign country R, solely for the purpose of participating in the proposed transaction.

(b) P will then transfer all of the stock of S-1 to S-2 in exchange for additional shares of voting common stock of S-2.

(c) Immediately after P's transfer of the stock of S-1 to S-2, pursuant to a plan of reorganization X, Y, and Z, as well as S-1, will transfer substantially all of their assets (subject to liabilities) to N, in exchange for additional shares of common stock of N.

(d) X, Y, Z, and S-1 will then be liquidated and S-2 will receive in liquidation the N stock held by X, Y, Z, and S-1.

Thus, upon consummation of the plan N will have acquired substantially all of the assets of X, Y, Z, and S-1.

Section 351 of the Code provides, in part, that no gain or loss will be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c) of the Code) of the corporation.

Section 368(a)(1)(D) of the Code provides that the term "reorganization" means a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the corporation to which the assets are transferred; but only if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction that qualifies under section 354, 355, or 356.

Section 368(c) of the Code defines the term "control" to mean the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation.

Section 368(a)(1)(C) of the Code provides that the term "reorganization" means the acquisition by one corporation, in exchange solely for all or a part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), 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 the property acquired is subject to a liability, shall be disregarded.

Since the two steps of P's transfer of the stock of S-1 to S-2 immediately followed by N's acquisition of S-1's assets are part of a prearranged, integrated plan which has as its objective the consolidation of all of the operating companies in N, the two steps should not be viewed independently of each other for Federal income tax purposes. Compare Rev. Rul. 54-96, 1954-1 C.B. 111, modified by Rev. Rul. 56-100, 1956-1 C.B. 624, and Rev. Rul. 70-225, 1970-1 C.B. 80. See Rev. Rul. 73-16, 1973-1 C.B. 186. See also American Bantam Car Co., 11 T.C. 397 (1948), aff'd 177 F. 2d 513 (3d Cir. 1949), cert. denied, 339 U.S. 920 (1950).

Accordingly, the transfer by P of the stock of S-1 to S-2 will not constitute an exchange within the meaning of section 351 of the Code. Instead, N will be viewed as directly acquiring substantially all of the assets of S-1 in exchange for stock of S-2. This recast transaction does not meet the definitional requirements of a section 368(a)(1)(D) reorganization because neither S-1 nor P (the transferor or its shareholder) will be in control of N, within the meaning of section 368(c), immediately after the transaction. However, the direct transfers of assets of X, Y and Z to N in exchange for common stock of N, in each instance, will qualify as reorganizations within the meaning of section 368(a)(1)(D) because S-2, the sole shareholder of X, Y, and Z will be in control of N, within the meaning of section 368(c), immediately after each transfer.

On the other hand, the acquisition of the assets of S-1 (subject to liabilities) in exchange for stock of S-2 by N, as recast, may be properly characterized as an acquisition of substantially all of the assets of S-1 by N in exchange solely for part of the voting stock of S-2 which is in control of N and as such constitutes a reorganization within the meaning of section 368(a)(1)(C) of the Code. Compare Rev. Rul. 67-274, 1967-2 C.B. 141.