Rev. Rul. 54-96

Advice is requested whether the transaction described below constitutes either a nontaxable reorganization under section 112(g)(1)(D) of the Internal Revenue Code or a tax-free exchange under section 112(b)(5).

X Corporation was engaged in two separate businesses. In 1951 X Corporation organized a new corporation, the Y Corporation, and transferred to it all the assets pertaining to one of such businesses (subject to applicable liabilities) in exchange for all of the stock of Y. X thereupon, and as a part of a prearranged plan, transferred all of the stock of Y to the Z Corporation, an unrelated corporation that has been engaged in business for many years, in exchange for which Z issued to X 20 percent of Z's voting stock.

Section 112(g)(1)(D) of the Internal Revenue Code provides that the term `reorganization' includes a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its shareholders or both are in control of the corporation to which the assets are transferred. Section 112(b)(5) provides in part that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation. Section 112(h) defines the term `control' to mean the ownership of stock possessing at least 80 per centum of the total combined voting power of all classes of stock entitled to vote and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.

The two steps of the transaction described above were part of a prearranged integrated plan, and may not be considered independently of each other for Federal income tax purposes. See Helvering v. Bashford , 302 U.S. 454, Ct. D. 1299, C.B. 1938-1, 286; Minnesota Tea Co. v. Helvering , 302 U.S. 609, Ct. D. 1305, C.B. 1938-1, 288; and Bassick v. Commissioner , 85 F.(2d) 8 (2nd Cir. 1936), cert. den. 299 U.S. 592.

Since as a result of the whole transaction the X Corporation was not in control of the Y Corporation after transferring a part of its assets to that corporation, the transaction did not constitute a reorganization as defined in section 112(g)(1)(D), nor did it constitute a tax-free transfer under section 112(b)(5). Similarly, section 112(g)(1)(B) is not applicable, for in net effect X transferred part of its assets to Z in exchange for a part of the Z stock, rather than all the stock of a previously existing corporation. It is immaterial whether the transaction is treated as consisting of two taxable steps (a taxable exchange by X of part of its assets for the stock of Y followed by a taxable exchange by X of Y stock for Z stock) or whether it is treated as a single taxable transaction (in substance a taxable transfer by X of part of its assets to Z in exchange for 20 percent of Z's stock, followed by a nontaxable transfer by Z of the newly acquired assets to Y in exchange for Y's stock). In either case the X Corporation has realized a gain or loss measured by the difference between the fair market value of the Z stock received by it and the basis in its hands of the assets transferred. The basis of the stock of Z in the hands of X will be equal to the fair market value of said stock at the time it is received. The basis of the stock of Y in the hands of Z will be its fair market value at the time it is received by Z. The basis to Y Corporation of the assets received by Y will be their fair market value at the time of receipt.