Rev. Rul. 76-187

P corporation owned all of the stock of S corporation for more than 5 years. The stock of P is widely held and publicly traded. For business reasons separate and apart from those discussed below, the shareholders of P transferred their P stock to N corporation in exchange for stock of N; N is a newly formed corporation that will be a holding company.

Subsequent to the acquisition of all of the P stock by N, P distributed all of the S stock to N. This distribution was necessary because under state and local law, both P and N would be paying a subsidiary capital tax on the value of S. The distribution results in a substantial reduction in the amount of state and local taxes paid by P because only N, and not both N and P, woud pay the subsidiary capital tax on the value of S. P and S are each engaged, immediately after the distribution, in the active conduct of a trade or business within the meaning of section 355(b) of the Internal Revenue Code of 1954. The transaction was not used principally as a device for the distribution of earnings and profits within the meaning of section 355(a)(1)(B).

Held, the distribution by P of the S stock to N was carried out for purposes germane to the business of P within the meaning of section 1.355-2(c) of the Income Tax Regulations since the distribution results in a substantial reduction in state and local taxes paid by P. Therefore, the distribution is not taxable to N under section 355(a)(1) of the Code.