Rev. Rul. 69-630

Advice has been requested as to the treatment of a "bargain sale" between two corporate entities controlled by the same shareholder(s).

A, an individual, owns all of the stock of X corporation and all of the stock of Y corporation. In 1967, A caused X to sell certain of its property to Y for less than an arm's length price. It has been determined that such sale had as one of its principal purposes the avoidance of Federal income tax and resulted in a significant understatement of X's taxable income.

Section 482 of the Internal Revenue Code of 1954 provides authority to distribute, apportion, or allocate gross income, deductions, and credits among related organizations, trades, or businesses if it is necessary in order to clearly reflect the income of such entities or to prevent the evasion of taxes.

Section 482 of the Code applies to bargain sale transactions between brother-sister corporations that result in significant shifting of income. Where an allocation is made under section 482 of the Code as a result of a bargain sale between brother-sister corporations, the amount of the allocation will be treated as a distribution to the controlling shareholder(s) with respect to the stock of the entity whose income is increased and as a capital contribution by the controlling shareholder(s) to the other entity involved in the transaction giving rise to the section 482 allocation.

Accordingly, in the instant case, the income of X for 1967 will be increased under section 482 of the Code to reflect the arm's length price of the property sold to Y. The basis of the property in the hands of Y will also be increased to reflect the arm's length price. See section 1.482-1(d) of the Income Tax Regulations. Furthermore, the amount of such increase will be treated as a distribution to A, the controlling shareholder, with respect to his stock of X and as a capital contribution by A to Y.

Because the transaction giving rise to the section 482 allocation had as one of its principal purposes the avoidance of Federal income tax, it is not subject to the provisions of Revenue Procedure 65-17, C.B. 1965-1, 833, as amended by Revenue Procedure 65-17, Amendment I, C.B. 1966-2, 1211. Revenue Procedure 65-17, among other things, permits a qualifying United States taxpayer, whose taxable income has been increased by reason of an allocation under section 482 of the Code to receive payment from the entity from, or to, which the allocation of income, or deductions, was made of an amount equal to a part, or all, of the amount allocated, without further income tax consequences. However, Sec. 3.02 of Revenue Procedure 65-17 states that the treatment provided by the Revenue Procedure is available for taxable years beginning after December 31, 1962 (amended by Revenue Procedure 65-17, Amendment I, to read "December 31, 1964") only if the transaction giving rise to the section 482 allocation did not have as one of its principal purposes the avoidance of Federal income tax.