Rev. Rul. 54-192

Advice is requested with respect to the tax consequences for Federal income tax purposes of certain proposed transactions to be consummated pursuant to a plan approved by the Securities and Exchange Commission.

X Corporation, a registered holding company under the Public Utility Holding Company Act of 1935, has outstanding only one class of capital stock consisting of 1,000 shares par value $6 per share. X Corporation owns 14 subsidiaries, 2 of which are the Y Corporation and the Z Corporation. Y Corporation, a gas utility company, has outstanding 400 shares of common stock, par value $10 per share, all of which are directly owned by X Corporation, and has first mortgage bonds, all of which are owned by the public. Z Corporation's sole business is the operation and maintenance of Y Corporation's interurban distribution system. Its securities consist of 10 shares of no par value common stock, all directly owned by X Corporation.

Pursuant to an order of the Securities and Exchange Commission that satisfies the conditions of section 371(f) of the Code, it is proposed that Y Corporation will amend its certificate of incorporation to increase its authorized common stock from 500 shares, par value $10 per share, to 1,100 shares of par value of $5 per share. Y Corporation will issue 1,000 shares of such $5 par value common stock to X Corporation in exchange for 400 shares of $10 par value common stock now held by X Corporation and will increase its capital account from $4,000 to $5,000 by transferring thereto $1,000 from its earned surplus account. After the receipt by X Corporation of the new common stock of Y Corporation, X Corporation will transfer and distribute such stock, on a share for share basis, to its stockholders via a transfer agent. Z Corporation will be dissolved and X Corporation will acquire all of its then remaining assets and will assume all of its liabilities to creditors in an amount not exceeding the value of the assets acquired.

Section 112(b)(8) of the Internal Revenue Code, in conjunction with sections 371, 372, and 373 (supplement R) of the Code, provides for nonrecognition of gain or loss and adjustment to basis in the case of certain exchanges and distributions ordered by the Securities and Exchange Commission under the provisions of Section 11(b) of the Public Utility Holding Company Act of 1935 (15 U.S.C. 79K(b)).

Section 112 of the Internal Revenue Code relating to the recognition of gain or loss provides in part as follows:

(b) EXCHANGES SOLELY IN KIND.-

*

(8) EXCHANGES AND DISTRIBUTIONS IN OBEDIENCE TO ORDERS OF SECURITIES AND EXCHANGE COMMISSION.-In the case of any exchange or distribution described in section 371, no gain or loss shall be recognized to the extent specified in such section with respect to such exchange or distribution.

Section 371 of the Internal Revenue Code relating to the nonrecognition of gain or loss on exchanges or distributions in obedience to orders of the Securities and Exchange Commission provides in part as follows:

(a) EXCHANGES OF STOCK OR SECURITIES ONLY.-No gain or loss shall be recognized to the transferor if stock or securities in a corporation which is a registered holding company or a majority-owned subsidiary company are transferred to such corporation or to an associate company thereof which is a registered holding company or a majority-owned subsidiary company solely in exchange for stock or securities * * * and the exchange is made by the transferee corporation in obedience to an order of the Securities and Exchange Commission.

*

(c) DISTRIBUTION OF STOCK OR SECURITIES ONLY.-If there is distributed, in obedience to an order of the Securities and Exchange Commission, to a shareholder in a corporation which is a registered holding company or a majority-owned subsidiary company, stock or securities * * * without the surrender by such shareholder of stock or securities in such corporation, no gain to the distributes from the receipt of the stock or securities so distributed shall be recognized.

(d) TRANSFERS WITHIN SYSTEM GROUPS.-(1) No gain or loss shall be recognized to a corporation which is a member of a system group (A) if such corporation transfers property to another corporation which is a member of the same group in exchange for other property, and the exchange by each corporation is made in obedience to an order of the Securities and Exchange Commission, * * *.

Section 39.371-2 of Regulations 118 states, in part, that the general rule is that the entire amount of gain or loss from the sale or exchange of property is to be recognized under section 112(a) and that the entire amount received as a dividend is to be included in gross income under the provisions of sections 22(a) and 115 of the Code. One of the exceptions to the general rule is provided in section 112(b)(8) with respect to exchanges, sales, and distributions specifically described in section 371 of the Code. In the instant case, since the order of the Securities and Exchange Commission states that these transactions are `necessary or appropriate to effectuate the provisions of Section 11(b) of the act' and such order otherwise satisfies the conditions of section 371(f) of the Code, the transactions meet the requirements of sections 371, 372, and 373.

Accordingly, it is held that no gain or loss will be recognized to Y Corporation as a result of its increasing and changing its outstanding capital stock; increasing its capital account by a transfer out of its earned surplus account; and issuing new certificates representing increased shares to X Corporation or its designees in exchange for such certificates now held by X Corporation. No gain or loss will be recognized to X Corporation as a result of the exchange by it of old shares for new shares of stock of Y Corporation. No gain or loss will be recognized to X Corporation as a result of the distribution by it to its stockholders of shares of stock of Y Corporation, notwithstanding the fact that the value of such stock will be substantially greater than the basis of such stock in the hands of X Corporation. The transactions will not diminish the accumulated earnings and profits of Y Corporation available for the distribution of taxable dividends nor of X Corporation as a result of the distribution. No gain or loss will be recognized to the stockholders of X Corporation as a result of the receipt by them of the stock of Y Corporation transferred and distributed to them by X Corporation or the transfer agent pursuant to the plan. The cost or other basis of the stock of X Corporation in the hands of the stockholders, whether received from X Corporation or the transfer agent, must be apportioned between the stock of X Corporation and the stock of Y Corporation in proportion to the fair market value of each as of the effective date of the distribution by X Corporation. The holding period of the stock of Y Corporation received by a holder of stock of X Corporation on the distribution will include the period during which the stock of X Corporation was held. No gain or loss will be recognized to X Corporation as a result of complete liquidation of Z Corporation and the transfer of its assets, subject to its liabilities, to X Corporation. The basis of the assets of Z Corporation in the hands of X Corporation will be the same as the basis of such assets in the hands of Z Corporation immediately prior to the liquidation.