Rev. Rul. 84-44

ISSUE

Under the facts described below, does section 351 of the Internal Revenue Code apply to the transfer of assets from Y to P in exchange for P stock?

FACTS

X, Y and P were unrelated corporations. In a transaction qualifying as a reorganization under sections 368(a)(1)(A) and (a)(2)(D) of the Code, X was merged into S, a wholly owned subsidiary of P. In the transaction, the shareholders of X received shares of P stock in exchange for their shares of X stock. At the same time, as part of an overall plan, Y transferred part (but less than substantially all) of its assets to P in exchange for P stock. While Y did not have the requisite control of P to qualify its transfer of assets within the provisions of section 351, Y together with the former shareholders of X were in control of P within the meaning of section 368(c) of the Code.

LAW AND ANALYSIS

Section 368(a)(2)(D) of the Code provides that the acquisition by one corporation, in exchange for stock of a corporation which is in control of the acquiring corporation, of substantially all of the properties of another corporation shall not disqualify the transaction under section 368(a)(1)(A) if no stock of the acquiring corporation is used in the transaction and the transaction would have qualified as a reorganization under section 368(a)(1)(A) had the merger been into the controlling corporation.

Section 351(a) of the Code provides that no gain or loss will be recognized if property is transferred to a corporation solely in exchange for its stock and immediately after the exchange the transferors are in control of the corporation (as defined in section 368(c)).

Although P stock was used as the consideration in the merger of X into S, the shareholders of X did not transfer any property to P. Therefore, since P is not the transferee of the stock of X, the P stock received by the shareholders of X is not taken into account with the P stock received by Y in determining whether the requirements of section 351 of the Code have been met. The only assets received by P were transferred by Y, and since Y was not in control of P immediately after the transfer, the transaction does not qualify under section 351. Additionally, since P is not the transferee of the X assets, the receipt of P stock by X upon the transfer of its assets to S cannot be aggregated with the P stock received by Y in determining whether the 80 percent control requirement of section 351 could be met by X and Y.

The instant case should be compared with Rev. Rul. 68-357, 1968-2 C.B. 144, and Rev. Rul. 76-123, 1976-1 C.B. 94. In those rulings, stock received by individual transferors was aggregated with stock received in reorganizations for purposes of the control requirement of section 351 of the Code when the transfers were to the same corporation.

HOLDING

Since the control requirement of section 351 of the Code was not met by Y, any gain or loss realized by Y on the exchange will be recognized as provided by section 1001 of the Code. No gain or loss is recognized to P under section 1032(a) upon the exchange with Y of P stock for assets of Y.

EFFECT ON OTHER REVENUE RULING

Rev. Rul. 68-357 and Rev. Rul. 76-123 are distinguished.