SERVICE OFFERS GUIDANCE FOR REVENUE RULINGS REGARDING DISTRIBUTIONS FOR 'C' AND 'D' REORGANIZATIONS.

Rev. Proc. 89-50

SECTION 1. PURPOSE

This revenue procedure further amplifies Rev. Proc. 77-37, 1977- 2 C.B. 568, as amplified by Rev. Proc. 86-42, 1986-2 C.B. 722.

SEC. 2 BACKGROUND

Section 7 of Rev. Proc. 77-37, as amplified by Rev. Proc. 86-42, contains certain standard representations that ordinarily must be submitted as a prerequisite to the issuance of rulings on the tax consequences of reorganizations described in section 368(a) of the Internal Revenue Code. These representations ensure that specific statutory and judicial requirements and administrative ruling guidelines are satisfied and facilitate the timely processing of letter ruling requests.

The Service has received many requests for rulings under sections 368(a)(1)(C) and 368(a)(1)(D) of the Code with respect to transactions in which the target corporation does not dissolve under state law so that the value of its corporate charter can be realized. The retention of the corporate charter and those assets necessary to satisfy state law minimum capital requirements raises an issue of whether the distribution requirements applicable to reorganizations described in sections 368(a)(1)(C) and 368(a)(1)(D) have been satisfied. Section 368(a)(2)(G)(i) and section 354(b)(1)(B) require as a prerequisite to qualifying as a reorganization under section 368(a)(1)(C) or section 368(a)(1)(D), respectively, that the target corporation distribute all of the stock, securities, and property it receives from the acquiring corporation, as well as the target corporation's other properties, pursuant to the plan of reorganization.

Section 368(a)(2)(G)(ii) of the Code provides the Secretary with the authority to waive the distribution requirement in section 368(a)(1)(C) reorganizations subject to any conditions the Secretary may prescribe. The legislative history indicates that Congress anticipated that waivers would be granted in those cases where the distribution requirement would result in substantial hardship upon the condition that the target corporation and its shareholders are treated as if the retained assets are distributed and then contributed to the capital of a new corporation. H.R. Conf. Rep. No. 861, 98th Cong., 2d Sees. 845-46 (1984), 1984-3 (Vol. 2) C.B. 98-100. The loss of a valuable nontransferable charter was considered to constitute a substantial hardship resulting from the distribution requirement. 1 S. Prt. No. 169, 98th Cong., 2d Sess. 205 (1984).

Treating the distribution requirement of section 368(a)(2)(G)(i) of the Code as satisfied in a section 368(a)(1)(C) reorganization through a deemed distribution of assets followed by a contribution to the capital of a new corporation is consistent with established law regarding de facto dissolutions. Similarly, treating the distribution requirement of section 354(b)(1)(B) applicable to reorganizations under section 368(a)(1)(D) as satisfied under similar circumstances is also appropriate.

Accordingly, the Service has established certain conditions under which it ordinarily will rule that the distribution requirement applicable to reorganizations under sections 368(a)(1)(C) and 368(a)(1)(D) of the Code has been satisfied. These conditions are contained in representations that must be submitted in addition to the standard representations contained in sections 7.05 and 7.06 of Rev. Proc. 77-37, as amplified by Rev. Proc. 86-42.

SEC. 3. PROCEDURE

Rev. Proc. 77-37, as amplified by Rev. Proc. 86-42, is further amplified to include the following subsection under section 7:

09 Additional representations for retention of corporate charters in section 368(a)(1)(C) and section 368(a)(1)(D) reorganizations:

1. TARGET WILL RETAIN ONLY ITS CORPORATE CHARTER AND THOSE ASSETS, IF ANY, NECESSARY TO SATISFY STATE LAW MINIMUM CAPITAL REQUIREMENTS TO MAINTAIN CORPORATE EXISTENCE (MINIMUM CAPITAL).

2. FOR PURPOSES OF THE REPRESENTATION THAT ACQUIRING WILL ACQUIRE AT LEAST 90 PERCENT OF THE FAIR MARKET VALUE OF THE NET ASSETS AND AT LEAST 70 PERCENT OF THE FAIR MARKET VALUE OF THE GROSS ASSETS HELD BY TARGET IMMEDIATELY PRIOR TO THE TRANSACTIONS, THE CORPORATE CHARTER AND MINIMUM CAPITAL, IF ANY, RETAINED BY TARGET WILL BE INCLUDED AS ASSETS OF TARGET HELD IMMEDIATELY PRIOR TO THE TRANSACTION.

3. THE SOLE PURPOSE FOR HAVING TARGET MAINTAIN ITS CORPORATE EXISTENCE UNDER STATE LAW IS TO ISOLATE TARGET'S CHARTER FOR RESALE TO AN UNRELATED PURCHASER. FOR PURPOSES OF THIS REPRESENTATION AND REPRESENTATION 4, BELOW, AN UNRELATED PURCHASER IS A PURCHASER THAT DID NOT OWN, ACTUALLY OR CONSTRUCTIVELY PURSUANT TO SECTION 318(a) OF THE CODE AS MODIFIED BY SECTION 304(c)(3), ANY STOCK OF TARGET PRIOR TO THE REORGANIZATION OR DOES NOT OWN, ACTUALLY OR CONSTRUCTIVELY PURSUANT TO SECTION 318(a) AS MODIFIED BY SECTION 304(c)(3), ANY STOCK OF ACQUIRING SUBSEQUENT TO THE REORGANIZATION.

4. AS SOON AS PRACTICABLE, BUT IN NO EVENT LATER THAN 12 MONTHS FOLLOWING THE DATE SUBSTANTIALLY ALL OF THE ASSETS ARE TRANSFERRED TO ACQUIRING, TARGET WILL BE SOLD TO AN UNRELATED PURCHASER OR DISSOLVED UNDER STATE LAW. IF TARGET IS SOLD, THEN IMMEDIATELY PRIOR TO THE SALE OF TARGET BY ITS SHAREHOLDERS, THE CORPORATE CHARTER AND MINIMUM CAPITAL, IF ANY, RETAINED BY TARGET WILL BE TREATED FOR FEDERAL TAX PURPOSES AS IF THEY ARE DISTRIBUTED TO TARGET'S SHAREHOLDERS IN A DISTRIBUTION TO WHICH SECTIONS 356 AND 361(c) OF THE CODE APPLY AND THEN CONTRIBUTED TO THE CAPITAL OF A NEW CORPORATION (NEW TARGET). IMMEDIATELY FOLLOWING THIS DEEMED DISTRIBUTION AND CONTRIBUTION, TARGET WILL BE TREATED FOR FEDERAL TAX PURPOSES AS A NEW CORPORATION AND WILL OBTAIN A NEW EMPLOYER IDENTIFICATION NUMBER. IF TARGET IS DISSOLVED, THEN IN ACCORDANCE WITH THE PLAN OF REORGANIZATION, THE MINIMUM CAPITAL WILL BE RECEIVED BY TARGET'S SHAREHOLDERS IN A DISTRIBUTION TO WHICH SECTIONS 356 AND 361(c) OF THE CODE APPLY OR RECEIVED BY ACQUIRING IN A TRANSFER TO WHICH SECTION 361(a) APPLIES.

SEC. 4. EFFECTIVE DATE

This revenue procedure is effective August 28, 1989, the date of its publication in the Internal Revenue Bulletin.

SEC. 5. EFFECT ON OTHER REVENUE PROCEDURES

Rev. Proc. 77-37, as amplified by Rev. Proc. 86-42, is further amplified.

DRAFTING INFORMATION

The principal author of this revenue procedure is Paul Horrell of the Office of Assistant Chief Counsel (Corporate). For further information regarding this revenue procedure contact Paul Horrell on (202) 566-2457 (not a toll-free call).