Rev. Rul. 80-240

ISSUE

Does section 351(a) of the Internal Revenue Code apply to the transaction described below?

FACTS

X is a corporation engaged in the general banking business that has solely common stock outstanding. In order to acquire indirect ownership of X through a bank holding company and to satisfy the appropriate banking rules and regulations, A, an individual who previously owned no X stock, devised the following plan. A first borrowed money from an unrelated financial institution B to acquire ninety percent of the X stock, pledging the X stock as security. A acquired the remaining 10 percent of X stock with his personal funds. A then formed Y, a new corporation, to be operated as a bank holding company, and immediately transferred all the X stock to Y. In exchange therefor, Y issued to A all of its stock and assumed the indebtedness incurred by A. The assumption by Y was done with the agreement of B and operated to release A from any liability with respect to the borrowed funds.

LAW AND ANALYSIS AND HOLDING

Section 351(a) 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.

Section 368(c) of the Code provides that the term "control" means 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 304(a)(1) of the Code provides, in part, that where one or more persons are in control, as defined in section 304(c), of each of two corporations and, in return for property, one of the corporations acquires stock in the other corporation from the person or persons so in control, the property received will be treated under section 302 as a distribution in redemption of stock of the corporation acquiring such stock. Section 304(c) provides, in part, that control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote, or at least 50 percent of the total value of shares of all classes of stock.

Section 357(a) provides, in part, that, except as provided in sections 357(b) and (c), if (1) the taxpayer receives property that would be permitted to be received under section 351 without the recognition of gain if it were the sole consideration, and (2) as part of the consideration, another party to the exchange assumes a liability of the taxpayer, or acquires from the taxpayer property subject to a liability, then such assumption or acquisition shall not be treated as money or other property, and shall not prevent the exchange from being within the provisions of section 351.

Section 351 of the Code applies to the transfer by A of the X stock to Y in exchange for the Y stock because A was in control of Y (as defined in section 368(c)) immediately after the exchange. It must be determined, however, whether section 357(a) or section 304(a)(1) applies to the assumption by Y of the indebtedness incurred by A in the transaction.

If A had first formed Y and then had caused Y to borrow money from B so that Y would have directly acquired the 90 percent of the shares of X stock, there would have been no need for an assumption of the indebtedness by Y. In substance, there was no plan or intention for A to either own the X stock, or to repay the loan proceeds which were used to acquire that stock. Thus, for federal income tax purposes, A will be treated for this part of the transaction as a mere intermediate agent employed solely to satisfy non-tax related rules and regulations and the assumption of the indebtedness will be disregarded. See Ciaio v. Commissioner, 47 T.C. 447 (1967), acq., 1967-2 C.B. 2 and Fox v. Harrison, 145 F.2d 521 (7th Cir. 1944). Consequently, neither section 357(a) of the Code nor section 304(a)(1) have any application to the transaction since there is no assumption of a liability and also no "property" is distributed by Y, the acquiring-transferee corporation, within the meaning of section 304(a)(1).

Compare Rev. Rul. 80-239, page 103, this Bulletin, for tax treatment where a transferor received cash in addition to stock of the transferee corporation.