Rev. Rul. 54-482

Advice is requested with respect to the tax consequences, for Federal income tax purposes, of a proposed change in the capital structure of M Corporation.

The M Corporation has authorized capital stock of 200 shares of common stock, no par value, of which 150 shares were issued and outstanding. It has an operating deficit of approximately 40 x dollars and a paid-in surplus of 400 x dollars. The paid-in surplus was created by the endorsement and donation by the shareholders of certain promissory notes held by them in the amount of 400 x dollars.

Pursuant to a plan approved by the stockholders and directors of M Corporation certain changes will be made. The legal name of the corporation will be changed from M Corporation to N Corporation. It proposes to write off the deficit to the paid-in surplus account and then to increase its capitalization to one million shares of common stock, par value $1 per share, by State charter amendment. The corporation will then issue certain shares of common stock pro rata to its shareholders in exchange for the shares of common stock presently held by them, and issue certain shares pro rata to its shareholders which will represent a stock dividend paid from the remaining paidin surplus account. The 200 shares of original common stock will be canceled. Both the shareholders and directors of the corporation will remain the same before and after the transaction.

In the instant case, the readjustment of the corporate structure of M Corporation meets the requisites of a nontaxable reorganization within the meaning of section 112(g)(1)(E) of the Internal Revenue Code of 1939, and will result in no gain or loss to either corporation.

No gain or loss will be recognized to the shareholders upon the receipt by them of the shares of new common stock in exchange for the old common stock presently held by them. No gain or loss will be recognized to the common stock shareholders upon the distribution of the stock dividend. The basis to the shareholders of the new common stock will be the same as the cost or other basis of the old common stock previously held by them. The accumulated earnings and profits of the company will not be diminished as a result of the above transaction and will be available for dividends within the meaning of section 115(a) of the Code of 1939.

The corporation, before and after the recapitalization, constitutes one and the same taxable entity for Federal income tax purposes. Cf. Rev. Rul. 54-269, page 114, this Bulletin. Accordingly, in the absence of a change of control for the purpose of evasion or avoidance of tax, a net operating loss sustained prior to the reorganization will be available as a net operating loss carryback or carryover under the provisions of section 122 of the Internal Revenue Code of 1939.