Rev. Rul. 74-382

Advice has been requested whether, under the circumstances described below, a corporation that distributes all the stock of a controlled corporation to its shareholders is thereafter engaged in the active conduct of a trade or business for purposes of section 355(b) of the Internal Revenue Code of 1954.

For over five years corporation X had owned all the stock of corporations Y and Z which represented all of X's assets. During this period Y had operated a manufacturing business and owned all the stock of two subsidiaries, while Z had owned all the stock of nine subsidiaries which represented all of Z's assets. Each subsidiary of Y and Z had operated a separate active trade or business throughout the period. For valid business reasons X distributed all the stock of Y to the shareholders of X in a transaction intended to meet the requirements of section 355 of the Code. After the distribution all of the assets of X consisted of the stock of Z.

Section 355(a)(1) of the Code provides for the nonrecognition of gain or loss to shareholders upon the distribution of the stock of a controlled corporation where, among other things, the requirements of section 355(b) are satisfied. For this purpose, the term "control" is defined in section 368(c) to mean the ownership of at least 80 percent of the voting stock and 80 percent of the nonvoting stock of a corporation.

Section 355(b)(1)(A) of the Code provides that to meet the active-business requirements of section 355(b) both the distributing and controlled corporation must each be engaged immediately after the distribution in the active conduct of a trade or business.

Section 355(b)(2) of the Code provides that for purposes of section 355(b)(1)(A) a corporation will be treated as engaged in the "active conduct of a trade or business" only if certain requirements are met, one of which, contained in section 355(b)(2)(A), is that such corporation is engaged in the active conduct of a trade or business, or substantially all of its assets consist of stock or securities of a corporation controlled by it (immediately after the distribution) which is so engaged.

Section 1.355-4(b)(1) of the Income Tax Regulations states that section 355(b)(2) of the Code provides rules for determining whether any corporation is treated as engaged in the active conduct of a trade or business for purposes of ascertaining whether the distributing corporation and the controlled corporation meet the requirements of section 355(b)(1). It further states, in pertinent part, that under section 355(b)(2)(A) a corporation is treated as so engaged if substantially all of its assets consist of the stock and securities of a corporation, or corporations, controlled by it (immediately after the distribution) each of which is engaged in the active conduct of a trade or business.

In the instant case, all of the assets of Z consist of the stock of nine subsidiaries controlled by it immediately after the distribution, each of which is engaged in the active conduct of a trade or business. Therefore, Z is treated as engaged in the active conduct of a trade or business as defined in section 355(b)(2) of the Code.

Accordingly, since immediately after the distribution all of the assets of X consist of the stock of Z (a corporation treated as engaged in the active conduct of a trade or business) and Z is controlled by X immediately after the distribution, X is engaged in the active conduct of a trade or business within the meaning of section 355(b)(1)(A) of the Code.