Rev. Rul. 70-296

Advice has been requested whether the provisions of section 301 of the Internal Revenue Code of 1954 apply to the distribution of property described below.

All the outstanding stock of X, a foreign corporation, is owned by Y, a domestic corporation. X is actively engaged in business. On January 15, 1970, Y distributed part of the X shares held by it to the holders of Y common stock as a dividend. On February 2, 1970, pursuant to a prearranged plan X redeemed all of its stock distributed to the Y shareholders at a total price equal in amount to the regular cash dividend that Y in previous quarters paid the Y shareholders on their common stock. No cash dividend was paid to the Y shareholders in the quarter.

Since the two steps of the transaction described above are part of a prearranged integrated plan they may not be considered independently for Federal income tax purposes. The net effect of the transaction is that X distributed cash to Y and the shareholders of Y received their regular quarterly cash dividend from Y.

Accordingly, both the distribution from X to Y and from Y to the Y shareholders are distributions subject to the provisions of section 301 of the Code.