Rev. Rul. 80-168

ISSUE Does a mere change in place of incorporation, qualifying as a reorganization under section 368(a)(1)(F) of the Internal Revenue Code, terminate the corporation's election to be treated as a possessions corporation under section 936 of the Code under the facts described below?

FACTS M, a corporation formed under the laws of state X and manufacturing electronic equipment in Puerto Rico, has elected to be treated as a possessions corporation under section 936 of the Code, having qualified for such election under the requirements set forth in this section. For valid business reasons, M desires to change its place of incorporation to state Y by merging with and into N, a new corporation organized under the laws of state Y specifically for this transaction, pursuant to state law and qualifying as a reorganization under section 368(a)(1)(F). N will be the surviving corporation and will be engaged in the same business in Puerto Rico as M was engaged in. By operation of law, the properties, liabilities, business operations, and shareholders of M will become those of N and M's corporate existence will be terminated.

LAW AND ANALYSIS

Section 936(a) of the Code generally provides that if a domestic corporation elects the application of this section and if certain conditions described therein are satisfied, there shall be allowed as a credit against the federal tax imposed an amount equal to the portion of the tax that is attributable to specified possession-source income.

Section 381 of the Code provides that in the case of the acquisition of the assets of a corporation by another corporation in connection with a reorganization described in section 368(a)(1)(F), that is, a mere change in identity, form, or place of organization, the acquiring corporation shall succeed to and take into account, as of the close of the day of transfer, the items described in section 381(c) of the transferor corporation.

Section 381(c) does not include in its description of items that the acquiring corporation succeeds to and takes into account an election to be treated as a possessions corporation under section 936 of the Code.

Section 1.381(a)-1(b)(3) of the Income Tax Regulations provides that section 381 of the Code does not apply to the carryover of an item or tax attribute not specified in section 381(c). This section of the regulations also provides, however, that in a case where section 381 does not apply to an item or tax attribute by reason of the preceding sentence, no inference is to be drawn from the provisions of section 381 as to whether any item or tax attribute shall be taken into account by the successor corporation.

In Rev. Rul. 64-250, 1964-2 C.B. 333, a corporation qualifying as a small business corporation under section 1371(a) of the Code that had elected not to be subject to tax under section 1372(a) was reorganized in another state under section 368(a)(1)(F). This reorganization was accomplished by the organization of a new corporation and the merger of the existing corporation into the new corporation. The surviving corporation also qualified as a small business corporation under section 1371(a). The revenue ruling holds that the reorganization qualifying under section 368(a)(1)(F) did not cause a termination of the election made under section 1372 by the existing corporation before its reorganization.

HOLDING

A mere change in place of incorporation, qualifying under section 368(a)(1)(F) of the Code, does not terminate the corporation's election to be treated as a possessions corporation under section 936 under the facts described above. N succeeds to M's section 936 election since N would also qualify for treatment as a possessions corporation.