Rev. Rul. 76-223

Advice has been requested whether the transaction described below satisfies the "control" requirements of section 368(c) of the Internal Revenue Code of 1954.

For valid business reasons corporation X desired to acquire the stock of corporation Y in a transaction within the meaning of section 368(a)(1)(B) of the Code. Y had 81 shares of voting common stock and 19 shares of non-voting preferred stock outstanding. X did not want to acquire any of the outstanding preferred stock of Y in the proposed transaction. Therefore, as a part of the overall plan and prior to the consummation of the acquisition, the charter of Y was amended to permanently give voting rights to holders of the preferred stock of Y, on a one vote per share basis, the same right attributable to the voting common stock. Subsequently, X acquired 81 shares of Y voting common stock solely in exchange for shares of X voting stock. There was no plan to later amend Y's charter and thereby revoke the voting rights of holders of Y preferred stock.

Section 368(a)(1)(B) of the Code provides that the term "reorganization" means the acquisition by one corporation in exchange solely for all or a part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation (whether or not such acquiring corporation had control immediately before the acquisition).

Section 368(c) of the Code states that for purposes of section 368(a)(1)(B), "control" means the ownership of stock possessing at least eighty percent of the total combined voting power of all classes of stock entitled to vote and 80 percent of the total number of shares of all other classes of stock.

Immediately after the transaction by which X acquired 81 shares of the voting common stock of Y in exchange for voting stock of X, X owned 81 percent of the total combined voting power of all classes of the stock of Y entitled to vote. The exchange of nonvoting preferred for voting preferred resulted in a permanent change in the rights of preferred shareholders prior to the acquisition of the voting common stock. Thus, there were no classes of nonvoting stock of Y outstanding at the time of the acquisition.

Accordingly, in the instant case, the control requirements of section 368(c) of the Code have been satisfied and the transaction qualifies as a reorganization within the meaning of section 368(a)(1)(B). Furthermore, no gain or loss is recognized under section 1036 upon the exchange of the Y nonvoting preferred stock for Y voting preferred stock pursuant to the amendment of Y's charter.