Rev. Rul. 75-561

Rev. Rul. 69-185, 1969-1 C.B. 108, stating that the Internal Revenue Service will not follow the decisions in Estate of Bernard H. Stauffer v. Commissioner, 403 F. 2d 611 (9th Cir. 1968); Associated Machine v. Commissioner, 403 F 2d 622 (9th Cir. 1968), nor that portion of the decision in J. E. Davant et al. v. Commissioner, 366 F. 2d 874 (5th Cir. 1966), cert. denied, 386 U.S. 1022 (1967), holding that a transaction resulting in the combination of two or more commonly owned operating corporations constitutes a reorganization within the meaning of section 368(a)(1)(F) of the Internal Revenue Code, is hereby revoked in light of the decisions in: Davant; Stauffer; Associated Machine; Home Construction Corp. of America v. United States; 439 F. 2d 1165 (5th Cir. 1971); Movielab, Inc. v. United States, 494 F. 2d 693 (Ct. Cl. 1974); Performance Systems, Inc. v. United States, 382 F. Supp. 525 (M.D. Tenn. 1973), aff'd per curiam. 501 F. 2d 1338 (6th Cir. 1974); TFI Companies Inc. v. United States. No. 73-958-MML (C.D. Cal. Sept. 13, 1974); Charles C. Chapman Building Co. et al. v. United States, 34 A.F.T.R. 2d 74-6193 (C.D. Cal. 1974); and Eastern Color Printing Co., 63 T.C. 27 (1974) (acquiescence, page 1 of this Bulletin).

In conformance with the rules of these decisions, it is now the position of the Service that the combination of two or more corporations may qualify as a reorganization within the meaning of section 368(a)(1)(F) of the Code, provided certain requirements are satisfied. These requirements are as follows:

(1) There must be complete identity of shareholders and their proprietary interests in the transferor corporations and acquiring corporations. In the case of wholly-owned subsidiary-into-parent merger, this requirement will be deemed to be satisfied when the shareholders and their propritary interests in the parent do not change as a result of the merger;

(2) The transferor corporations and the acquiring corporation must be engaged in the same business activities or integrated activities before the combination; and,

(3) The business enterprise of the transferor corporations and the acquiring corporation must continue unchanged after the combination.

Furthermore, it is now the position of the Service that a merger of a wholly-owned subsidiary corporation into its parent which qualifies as a liquidation under section 332 of the Code (to which section 334(b)(2) does not apply) and as a reorganization under section 368(a)(1)(F) constitutes an "F" reorganization, for purposes of section 381(b)(3). See Movielab, Inc., Performance Systems, Inc. and Eastern Color Printing Co.

In view of Stauffer and Home Construction, it is now also the position of the Service that an acquiring corporation in a reorganization qualifying under section 368(a)(1)(F) of the Code which desires to carry back losses arising after the reorganization to a transferor corporation's pre-merger taxable years under section 381(b)(3) must satisfy two requirements:

(1) it must be able to show that the losses are attributable to a separate business unit or division formerly operated by the transferor corporations; and,

(2) the transferor corporation must have income in its pre-reorganization taxable years against which such losses can be offset.

The manner in which the above requirements limit the carry back of losses to the pre-reorganization taxable years of a transferor corporation is illustrated by the following example. Corporation X, Corporation Y and Corporation Z have been owned since their formation by A, an individual. Each is engaged in the same business and reports on a calendar year. On December 31, 1972, X, Y, and Z are merged into a new corporation, XYZ, with A exchanging his X, Y, and Z stock for stock of XYZ. XYZ continues the same operations as its predecessor or constituent corporations X, Y, and Z. In its taxable year ended December 31, 1973, XYZ has a net operating loss of $70,000, $50,000 of which is attributable to the former business conducted by X and $20,000 of which is attributable to the former business of Y. For its taxable year ended December 31, 1972, X had taxable income of $10,000; for its taxable year ended December 31, 1971, it had taxable income of $15,000; for its taxable year ended December 31, 1970, it had taxable income of $20,000. Y had taxable income of $10,000 for its taxable year ended December 31, 1972, and net operating loss in all prior years. Z has had taxable income in all years. Applying the rules set forth in the cited Court cases, XYZ could carry back $45,000 of its net operating loss to the pre-merger years of X and $10,000 of its net operating loss to the pre-merger years of Y. The remaining $15,000 of the net operating loss cannot be carried back. It can only be carried forward.

Pursuant to the authority contained in section 7805(b) of the Code, this Revenue Ruling will not be applied adversely to taxpayers who want to treat their transactions in accord with the position set forth in Rev. Rul. 69-185 and who either have consummated transactions before December 29, 1975, the date of this Internal Revenue Bulletin, or have consummated transactions after that date pursuant to the terms of a binding written contract entered into before that date where such terms are in effect on the date of publications of this Revenue Ruling.

Rev. Rul. 69-185 is revoked.