Rev. Rul. 61-198

The Internal Revenue Service will not follow the decision of the United States Court of Appeals for the Sixth Circuit in Commissioner v. Edmund P. and Virginia Coady, 289 Fed. (2d) 490 (1961), affirming 33 T.C. 771 (1960), Nonacq. C.B. 1960-2, 8.

In the Coady case, "C" corporation, one functionally integrated business, transferred half of its business assets to Coady Company, a newly formed corporation, taking back all of the latter's stock, which it distributed to taxpayer (who owned fifty per cent of the outstanding stock of "C") in exchange for all of his stock in "C" corporation. The Tax Court of the United States, with six dissents, held that section 355 of the Internal Revenue Code of 1954 was applicable and that the distribution to the taxpayer of the Coady Company's stock accordingly qualified for nonrecognition of taxable gain. The reviewing court affirmed.

The decision, one of first impression, holds invalid the provision of the applicable Treasury regulations (section 1.355-1(a) of the Income Tax Regulations, promulgated December 2, 1955) which permits, without recognition of taxable gain to the shareholders or security holders, the separation of a corporation or corporations actively conducting two or more existing businesses but expressly provides that section 355 of the Code does not apply to the division of a single business.

Although there was no basis for request of certiorari to the Supreme Court of the United States in this case and certiorari was not applied for, the decision will not be followed as a precedent in the disposition of similar cases, and the Internal Revenue Service's position will be maintained pending further judicial test of the Treasury regulations.

¹ Based on Technical Information Release 339, dated October 3, 1961.