Rev. Rul. 69-294

Advice has been requested whether, under the circumstances described below, an acquisition of outstanding stock of a corporation held by minority interests is a "reorganization" within the meaning of section 368(a)(1)(B) of the Internal Revenue Code of 1954.

Corporation X owned all the outstanding stock of corporation Y. In turn, Y owned in excess of eighty percent of the outstanding stock of corporation Z. X desired to own directly one-hundred percent of the outstanding stock of Z. As part of plan, X caused Y to liquidate under section 332 of the Code and immediately thereafter, X acquired the remaining outstanding Z stock held by minority interests in exchange solely for X voting common stock.

Section 1.332-1 of the Income Tax Regulations provides that, under the general rule prescribed by section 331 of the Code for the treatment of distributions in liquidation of a corporation, amounts received by one corporation in complete liquidation of another corporation are treated as in full payment in exchange for stock in such other corporation.

Under the provisions of section 368(a)(1)(B) of the Code, the term "reorganization" includes 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) of the Code, "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 at least eighty percent of the total number of shares of all other classes of stock of the corporation.

An exchange under section 368(a)(1)(B) of the Code must be solely for voting stock of the acquiring corporation or for voting stock of a corporation in control of the acquiring corporation. In the present plan, part of the stock of Z (included in the assets of Y) was received by X in full payment in exchange not for its own stock but for the stock of Y. Only the minority stock interest of Z was acquired by X solely in exchange for voting stock of X. Since this was a single unified transaction it cannot be said that X acquired the stock of Z solely for its own voting stock or for the voting stock of a corporation in control of X.

Accordingly, the transaction did not qualify as a reorganization under section 368(a)(1)(B) of the Code to the minority shareholders of Z. Gain or loss will be recognized to the minority shareholders of Z measured by the difference between the fair market value of the stock of X received over the cost or other basis of the stock of Z surrendered.