Rev. Rul. 68-43

Advice has been requested whether an advance ruling is required under section 367 of the Internal Revenue Code of 1954 with respect to the transaction described below.

X a domestic corporation engaged in manufacturing and selling operations, owns all of the outstanding stock of Y , a foreign corporation similarly engaged. Y has 100 shares of common stock outstanding which have a fair market value of 5 x dollars per share. X proposes to transfer 300 x dollars to Y in exchange for 100 additional shares of Y common stock so that after the transfer 200 shares of Y common stock will be outstanding which will have a fair market value of 4 x dollars per share. No other property will be transferred to Y in connection with the transaction and no services have been or will be performed for Y in return for the Y stock.

Under section 351 of the Code, the amount of gain realized under section 1001 of the Code will not be recognized where property is transferred to a corporation in exchange for its stock if immediately after the exchange the transferor is in control of the corporation. Under section 367 of the Code, however, the nonrecognition provisions of section 351 of the Code are not applicable to the gain unless a taxpayer has established to the satisfaction of the Commissioner that the exchange was not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income taxes.

In the instant case, X will receive 100 shares of Y common stock having a fair market value of 4 x dollars per share or a total fair market value of 400 x dollars but will have transferred only 300 x dollars of cash to Y . Section 1.351-1(b)(1) of the Income Tax Regulations provides, in part, that where stock is received in disproportion to the interest in the property transferred, the entire transaction will be given tax effect in accordance with its true nature. The true nature of the proposed transaction is that X will exchange 300 x dollars for 60 shares of Y common stock having a fair market value of 5 x dollars per share in an exchange described in section 351 of the Code. Y will issue 400 additional shares of its common stock to X . The additional shares are not in payment for other property being transferred to Y by X and are not in payment for services to be furnished by X , nor are the additional shares being issued to X for any other type of consideration.

Accordingly, under these facts the 40 shares of Y stock will be treated as the distribution of a stock dividend which will not be includible in the gross income of X under section 305(a) of the Code. Since, under these circumstances, no gain is realized on an exchange described in section 351 of the Code, an advance ruling under section 367 of the Code is unnecessary.