LIQUIDATION OF SUBSIDIARY; NOMINAL ASSETS TRANSFERED TO NEW SUBSIDIARY

ISSUE

Under the circumstances described below, will the statutory merger of a wholly owned subsidiary corporation with and into its parent corporation immediately followed by the transfer by the parent corporation of a nominal amount of the subsidiary's cash to a newly formed wholly owned subsidiary of the parent prevent the transaction from qualifying as a complete liquidation of the former subsidiary within the meaning of section 332 of the Internal Revenue Code?

FACTS

P corporation owned all the stock of a subsidiary corporation, S-1, for several yers, and both P and S-1 were engaged in manufacturing. Pursuant to a plan of complete liquidtion adopted by P and S-1, S-1 merged with and into P under applicable state ("short form") merger laws. Immediately thereafter, P, solely to protect S-1's name, transferred a nominal amount of cash of S-1 to S-2, a newly formed subsidiary organized in the same state as S-1 and with the same name as S-1 to S-2, a newly formed subsidiary organized in the same state as S-1 and with the same name as S-1. No other assets were transferred to S-2, S-2 will conduct no business, and P does not intend to sell or otherwise dispose of the stock of S-2. The form of the transaction was chosen because the mangements of P and S-1 concluded that the liquidation of S-1 could most efficiently be effected through the use of the "short form" merger laws.

LAW AND ANALYSIS

Section 332(a) of the Code provides that no gain or loss is recognized on the receipt by a corporation of property distributed in complete liquidation of another corporation. Section 1.332-2(c) of the Income Tax Regulations provides that the retention of a nominal amount of asse ts for the sole purpose of preserving the liquidating corporation's legal existence will not disqualify the tranaction as a distribution in a complete liquidation. See also Rev. Rul. 54-518, 1954-2 C.B. 142, which holds that the retention of a charter by a liquidating corporation to protect its corporate name does not prevent the liquidation of a corporation from coming under the provisions of section 112(b)(7) of the Internal Revenue Code of 1939 (now section 333 of the Internal Revenue Code).

On the other hand, Rev. Rul. 76-525, 1976-2 C.B. 98, holds that the retention by a subsidiary corporation of any property, no matter how small in amount, for the purpose of continuing the operation of its present business or for the purpose of engaging in a new business, will prevent the distribution of property that is actually distributed to its parent from qualifying as a distribution in complete liquidation within the meaning of section 332 of the Code.

In the present situation, only a nominal amount of cash was transferred to S-2 for the sole purpose of protecting S 1's manufacturing business or to enable S-1 to enter a new business. If S-1 had not dissolved under state law and had retained its corporate charter and a nominal amount of cash, solely to preserve its legal existence, the retention would not disqualify the transaction as a complete liquidation of S-1 within the meaning of section 1.332-2(c) of the regulations. Since both the substance and effect of the present transaction is the same as if S-1 had merely preserved its legal existence, similar treatment under section 1.332-2(c) of the regulations will be accorded this transaction.

HOLDING

The transfer by P of a nominal amount of S-1 cash to S-2, immediately after the statutory merger of S-1 with and into P, will not prevent the transaction from qualifying as a complete liquidation of S-1 within the meaning of section 332 of the Code.