Rev. Rul. 54-120

Advice is requested whether, under the facts hereinafter stated, the taxpayer is an acquiring corporation within the meaning of section 461(a)(1)(D) of the Internal Revenue Code, or a purchasing corporation within the purview of section 474(a)(1)(A) of the Code.

The taxpayer was organized in 1949 for the purpose of carrying on a supply business formerly operated as a sole proprietorship under the name of M Company. During the same year the merchandise inventory, furniture and equipment, and goodwill of the proprietorship, with an aggregate balance sheet value of $13.4 x , were transferred to the taxpayer in exchange for all of its capital stock, a nontaxable exchange under section 122(b)(5) of the Internal Revenue Code. On the same date, the real estate of the proprietorship, with an aggregate balance sheet value of $.5 x , was transferred to the N Corporation, another corporation formed simultaneously with the taxpayer corporation. That part of such real estate necessary for the taxpayer's operations was leased from the N Corporation. The remaining assets, consisting of cash in the amount of $3.7 x , trade accounts receivable in the amount of $3.9 x , and other receivables and sundry assets in the amount of $.3 x , were retained by the proprietorship which also remained obligated for the liabilities, with an aggregate balance sheet value of $4 x , none being assumed by either corporation. No active business was carried on by the proprietorship after the date of the foregoing transactions.

Under section 461(a)(1)(D) of the Internal Revenue Code, an acquiring corporation is defined as a corporation which has acquired `substantially all the properties of a partnership in an exchange to which section 112(b)(5), or so much of section 112(c) or (e) as refers to section 112(b)(5), is applicable.' The word partnership as used in section 461(a)(1)(D), supra , is defined in section 461(f) of the Code to include a business owned by a sole proprietorship. On the basis of the facts submitted, it is held that the properties acquired by the taxpayer did not constitute substantially all the properties of the proprietorship within the meaning of section 461(a)(1)(D) of the Code.

Section 474 of the Code, entitled `Excess Profits Credit Based on Income-Certain Taxable Acquisitions,' defines a purchasing corporation, in subsection (a)(1)(A) thereof, as a corporation which, before December 1, 1950, acquired `in a transaction other than a transaction described in section 461(a), substantially all of the properties (other than cash) of another corporation, of a partnership, or of a business owned by a sole proprietorship.' Although the title to section 474 would, if construed literally, limit that section only to certain taxable acquisitions, it is the position of the Internal Revenue Service that a corporation which acquires properties from a sole proprietorship in a nontaxable transaction, as in the instant case, may qualify as a purchasing corporation under such section, provided the transaction is not one described in section 461(a) of the Code. This view is recognized in sections 40.474-5(a)(3) and 40.474-6(a)(3) of Regulations 130, as added by T.D. 5998, C.B. 1953-1, 372.

Accordingly, it is held that the taxpayer is not an acquiring corporation within the meaning of section 461(a)(1)(D) of the Internal Revenue Code, since it did not acquire substantially all of the properties of the sole proprietorship in exchange for all of its capital stock. It is further held that the taxpayer is a purchasing corporation within the purview of section 474(a)(1)(A) of the Code, since the properties acquired did constitute substantially all the properties (other than cash) owned by the proprietorship. The qualification of the purchase as one of substantially all the properties under section 474(a)(1)(A) is attributable to the exclusion of cash from consideration pursuant to the specific language of that section.