Rev. Rul. 54-107

Advice is requested whether the formation of a new corporation, and the transfer of certain assets under the following circumstances, will qualify as a part II transaction within the meaning of section 461(a)(1)(E) of the Internal Revenue Code, and whether the new corporation is entitled to compute its excess-profits credit under part II of subchapter D of chapter 1 of the Code.

The M corporation, hereinafter referred to as the taxpayer, was incorporated in 1922. Its authorized capital stock consists of 10,000 shares of preferred stock and 5,000 shares of common stock. Due to certain circumstances involved, its stockholders authorized the board of directors to liquidate and dissolve the corporation and to distribute the proceeds in accordance with the provisions of the stockholders liquidation agreement.

The taxpayer's assets included, among other things, the capital stock of several subsidiary corporations, all but one of which were liquidated under the provisions of section 112(b)(6) of the Code. The capital stock of the remaining subsidiary corporation was sold. Certain fixed assets were also sold. The proceeds of these transactions were distributed to the stockholders in accordance with the provisions of the liquidation agreement. The remaining assets of the taxpayer consisted of a manufacturing plant which it had been unable to dispose of, and certain other assets. In order to avoid unnecessary waste and to maintain the property in good condition for a potential purchaser, these assets, which constituted substantially less than all of the properties of the taxpayer, were transferred, subject to certain liabilities, to a newly organized corporation in exchange for all of its issued and outstanding capital stock. The taxpayer will retain the stock until a sale of it is effected, or until the assets of the new corporation are sold and the corporation is liquidated. The proceeds will then be distributed to the taxpayer's stockholders pursuant to the liquidation agreement.

Section 40.461-2 of Regulations 130 states in part:

SEC. 40.461-2. ACQUIRING CORPORATIONS.-(a) The types of transactions whereby a corporation becomes an acquiring corporation are specified in section 461(a). In addition to statutory mergers and consolidations and the acquisition of property in a complete liquidation in which gain or loss is not recognized because of the provisions of section 112(b)(6), only the following types of transactions are included.

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(5) Under section 461(a)(1)(E), the acquisition of a part, as distinguished from all or substantially all, of the properties of a corporation * * *. A transaction which qualifies as a Part II transaction without regard to section 461(a)(1)(E), is not a transaction described in section 461(a)(1)(E) for the purpose of any special rule under Part II pertaining to transactions described in section 461(a)(1)(E).

In view of the foregoing, it is held that the transfer of the remaining properties of the taxpayer to the new corporation was part of a single transaction which embraced the prior distributions by the taxpayer as well as the instant acquisition by the new corporation. Since, when viewed in this manner, less than `substantially all the properties' of the taxpayer were transferred to the newly formed corporation in exchange for all of its issued and outstanding capital stock, it is further held that the creation of the new corporation and the transfer of the remaining assets to it is, for purposes of subchapter D of chapter 1 of the Internal Revenue Code, a transaction within the meaning of section 461(a)(1)(E) of the Code, and that the new or `acquiring corporation' is entitled to compute its excess-profits credit under part II of subchapter D of chapter 1 of the Code.