Rev. Rul. 68-23

Advice has been requested as to the correct method of computing the gain to be recognized under section 356 of the Internal Revenue Code of 1954 by a shareholder who exchanges two blocks of stock having different adjusted bases in the circumstances described below.

X corporation acquired substantially all of the properties of Y corporation in exchange solely for X voting stock in a transaction qualifying as a reorganization within the meaning of section 368(a)(1)(C) of the Code. Pursuant to the plan of reorganization, Y distributed to each of its shareholders one share of X stock having a fair market value of 500 x dollars per share plus other property having a fair market value of 5 x dollars in exchange for each share of Y stock outstanding.

At the time of the reorganization, A owned 1,000 shares of the stock of Y which had been acquired in two separate transactions. The adjusted basis to A for each of 600 shares of Y stock was 495 x dollars per share and the adjusted basis to A for each of the other 400 shares of Y stock was 525 x dollars per share. The following computation reveals that if the transfer of each block were considered separately, then A would realize a gain on the exchange of one block and a loss on the exchange of the other block.

      Received in exchange for 600 shares of Y stock:

In determining the gain or loss on a transaction, each item of property transferred is considered separately. In determining the gain or loss realized by the shareholders in an exchange to which section 356 applies, each block of stock transferred which has a different adjusted basis must be treated separately. It is not proper to total the bases of the various blocks of stock and to subtract this total from the total value received in the exchange. Lynn B. Curtis v. The United States , 336 F.2d 714 (1964), affirming 215 Supp. 885 (1963). Moreover, any other treatment would have the effect of allowing losses which have been specifically disallowed by section 356(c) of the Code.

Accordingly, the loss of 8,000 x dollars on one block of stock may not be used to offset the gain of 6,000 x dollars on the other block of stock. The gain of 6,000 x dollars will be recognized in the amount of 3,000 x dollars, the amount of the other property received in the exchange as provided by section 356(a)(1) of the Code, but no loss will be recognized. In this case A's ratable share of the earnings and profits of Y exceeded 3,000 x dollars and, accordingly, the 3,000 x dollars will be taxable as a dividend under section 356(a)(2) of the Code.