Rev. Rul. 56-356

A question has been raised as to the meaning of the term `total value' as used in the phrase `more than 50 per centum of the total value of shares of all classes of stock' in section 430(e)(2)(B)(ii) of the Internal Revenue Code of 1939, and especially whether such phrase refers to par value.

Section 430(e)(1) of the 1939 Code sets forth the alternative excess profits tax rates under the Excess Profits Tax Act of 1950, as amended, on corporations which commenced business after July 1, 1945, and whose fifth taxable year ends after June 30, 1950. Clause (ii) of section 430(e)(2)(B) sets forth certain circumstances under which a corporation controlled by a group of not more than four persons, who also controlled another corporation, is considered to have been in existence and to have had taxable years for any period during which such other corporation was in existence. It states, in part, as follows:

(ii) * * * For the purpose of this clause, the term `control' means the ownership of more than 50 per centum of the total combined voting power of all classes of stock entitled to vote, or more than 50 per centum of the total value of shares of all classes of stock * * * Italics supplied.

Language similar to the phrase `more than * * * per centum of the total value of shares of all classes of stock' is also used in sections 15(c) and 501(a)(2) of the Code, relating, respectively, to the disallowance of surtax exemption and minimum excess profits credit in the case of a transfer of corporate assets to a controlled corporation under certain circumstances, and to the stock ownership requirement contained in the definition of a personal holding company. Section 39.15-2(c) of Regulations 118 provides, in part, in interpreting the word `value' in section 15(c), that `The fiar market value of a share shall be considered as the value to be used for the purpose of this computation.' Section 39.501-3(c) of Regulations 118 prescribes for the purposes of section 501(a)(2) a `value' rule which must likewise be deemed to refer to fair market value, stating that such value `may be determined upon the basis of the company's net worth, earning and dividend paying capacity, appreciation of assets, together with such other factors as have a bearing upon the value of the stock.'

Accordingly, it is held that the term `total value' as used in the phrase `more than 50 per centum of the total value of shares of all classes of stock' in section 430(a)(2)(B)(ii) of the 1939 Code, dealing with control of new corporations to which the alternatives excess profits tax rates apply, does not refer to the par value of the stock concerned, but to the fair market value of the stock, which should be determined in accordance with the standards set forth in sections 39.15-2(c) and 39.501-3(c) of Regulations 118, to the extent that such standards may appropriately be applied to the particular facts.