Rev. Rul. 69-617

Advice has been requested whether the transaction described below qualifies as a reorganization within the meaning of sections 368(a)(1)(A) and 368(a)(2)(C) of the Internal Revenue Code of 1954.

Corporation P owned more than eighty percent of the outstanding stock of corporation S. The balance of the outstanding stock of S was publicly held. For valid business reasons, P wanted to have the business of S conducted by a wholly owned subsidiary. In order to accomplish this result, S was merged into P pursuant to the laws of the states in which they were incorporated. The stock of S owned by P was cancelled and the minority shareholders of S received shares of common stock of P in exchange for their S stock. P then transferred all of the assets received from S, subject to all the liabilities of S, to its new subsidiary, corporation X.

Section 368(a)(1)(A) of the Code provides that the term "reorganization" includes a statutory merger or consolidation. Section 368(a)(2)(C) of the Code provides, in part, that a transaction otherwise qualifying under paragraph (1)(A) of section 368(a) of the Code will not be disqualified by reason of the fact that part or all of the assets that were acquired in the transaction are transferred to a corporation controlled by the corporation acquiring such assets. Section 1.368-2(b) of the Income Tax Regulations provides that the words "statutory merger or consolidation" refer to a merger or consolidation effected pursuant to the corporation laws of the United States or a State or Territory or the District of Columbia.

Section 332 of the Code provides that no gain or loss will be recognized on the receipt by a corporation of property distributed in complete liquidation of a subsidiary corporation under certain prescribed statutory provisions.

The specific question presented is whether the transfer of the assets of S to P may qualify as a reorganization inasmuch as the transfer is literally within the language of section 332 of the Code.

The purpose of the transaction in this case, was to have the business operated by S, a partially owned subsidiary, transferred to a wholly owned subsidiary. Since the assets of S were immediately transferred by P to X, there was no complete liquidation of S within the meaning of section 332 of the Code. However, the fact that P owned more than eighty percent of the stock of S does not prevent the transfer of the assets of S to P from qualifying as a statutory merger, where such assets are transferred to another subsidiary.

Accordingly, in the instant case, the merger of S into P followed by the transfer to X of all of the assets of S, subject to its liabilities, is a statutory merger within the meaning of sections 368(a)(1)(A) and 368(a)(2)(C) of the Code.