Rev. Proc. 66-34

SECTION 1. PURPOSE.

The purpose of this Revenue Procedure is to announce certain operating rules of the Internal Revenue Service pertaining to issuing ruling letters and in determining whether it should decline to issue ruling letters.

SEC. 2. BACKGROUND.

.01 When requested by taxpayers or their authorized representatives, the Reorganization Branch of the Income Tax Division issues ruling letters as to the tax consequences of corporate reorganizations, liquidations, stock dividends and redemptions; transfers to and distributions of stock or securities of controlled corporations; exchanges or distributions by corporations in obedience to orders of the Securities and Exchange Commission; and distributions by corporations pursuant to the Bank Holding Company Act. The Reorganization Branch also determines whether distributions, redemptions, exchanges or transfers referred to in sections 306(b)(4), 355(a)(1)(D)(ii), 367, 1492 and 1494 of the Internal Revenue Code of 1954 are in pursuance of a plan having as one of its principal purposes the avoidance of Federal income taxes and answers questions under section 1244 of the Code relating to small business stock.

.02 The Reorganization Branch has developed certain operating rules for determining whether a ruling will be issued in certain types of cases and the conclusions which will be expressed in such rulings.

.03 These operating rules are being published solely to provide assistance to taxpayers and their representatives in preparing ruling requests. These operating rules do not define, as a matter of law, the lower limits of "continuity of interest" or "substantially all of the properties"; nor do they define any other terms used in the Internal Revenue Code, Income Tax Regulations and prior Revenue Procedures discussed below.

.04 A requested ruling involving a question covered in section 3 of this revenue procedure will ordinarily be issued if the applicable operating rule or rules set forth in section 3 of this revenue procedure are complied with and if all other pertinent provisions of the Internal Revenue Code, Income Tax Regulations, Revenue Procedures and Revenue Rulings are satisfied.

SEC. 3. OPERATING RULES FOR ISSUING RULING LETTERS.

.01 The "substantially all" requirement of sections 354(b)(1)(A), 368(a)(1)(C) and 368(a)(2)(B)(i) of the Code is satisfied if there is a transfer of assets representing at least 90 percent of the fair market value of the net assets and at least 70 percent of the fair market value of the gross assets held by the corporation immediately prior to the transfer.

.02 The "continuity of interest" requirement of section 1.368-1(b) of the Income Tax Regulations is satisfied if there is a continuing interest through stock ownership in the acquiring or transferee corporation (or a corporation in "control" thereof within the meaning of section 368(c) of the Code) on the part of the former shareholders of the acquired or transferor corporation which is equal in value, as of the effective date of the reorganization, to at least 50 percent of the value of all of the formerly outstanding stock of the acquired or transferor corporation as of the same date. It is not necessary that each shareholder of the acquired or transferor corporation receive in the exchange stock of the acquiring or transferee corporation or a corporation in "control" thereof, which is equal in value to at least 50 percent of the value of his former stock interest in the acquired or transferor corporation, so long as one or more of the shareholders of the acquired or transferor corporation have a continuing interest through stock ownership in the acquiring or transferee corporation (or a corporation in "control" thereof) which is, in the aggregate, equal in value to at least 50 percent of the value of all of the formerly outstanding stock of the acquired or transferor corporation. Sales, redemptions, and other dispositions of stock occurring prior or subsequent to the exchange which are part of the plan of reorganization will be considered in determining whether there is a 50 percent continuing interest through stock ownership as of the effective date of the reorganization.

.03 In reorganizations under sections 368(a)(1)(A), 368(a)(1)(B) and 368(a)(1)(C) of the Code where the requisite stock or property has been acquired, it is not necessary that all of the stock of the acquiring corporation or a corporation in "control" thereof, which is to be issued in exchange therefor, be issued immediately provided (1) that all of the stock will be issued within five years from the date of the transfer of assets in the case of reorganizations under sections 368(a)(1)(A) and 368(a)(1)(C) of the Code, or within five years from the date of the initial exchange in the case of reorganizations under section 368(a)(1)(B) of the Code; (2) there is a valid business reason for not issuing all of the stock immediately, such as the difficulty in determining the value of the corporation being acquired; (3) the maximum number of shares which may be issued in the exchange is stated; and (4) the agreement evidencing the right to receive stock in the future prohibits assignment (except by operation of law) or, in the alternative, if the agreement does not prohibit assignments the right must not be evidenced by negotiable certificates of any kind and must not be readily marketable and (5) such right can give rise to the receipt of only additional stock of the acquiring corporation or a corporation in "control" thereof, as the case may be. Stock issued as compensation to the exchanging shareholders will not be considered to have been received in an exchange.

.04 The term "nominal amount" as used in sections 3.01-7 and 3.01-8 of Revenue Procedure 64-31, C.B. 1964-2, 947 will be deemed to mean 20 percent in value.

SEC. 4. RULINGS WITH RESPECT TO CONVERTIBLE STOCK.

A ruling will usually be issued to the effect that preferred stock that is convertible into common stock which is received in a reorganization by exchanging shareholders who will own no common stock after the reorganization will not be "section 306 stock", within the meaning of section 306(c) of the Code, provided the convertible preferred stock will be widely-held or it is represented that there will not be any conversion of the convertible preferred stock pursuant to a concerted plan which will result in both preferred and common stock being held by an exchanging shareholder. In all other cases, opinion will be reserved as to what part, if any, of the convertible preferred stock will constitute "section 306 stock."

SEC. 5. RULINGS UNDER SECTION 306(b)(4) OF THE CODE.

.01 A ruling will usually be issued under section 306(b)(4) of the Code to the effect that a distribution of "section 306 stock" (other than a distribution under section 305 of the Code) and the disposition or redemption of the "section 306 stock" is not pursuant to a plan of tax avoidance if the stock of the issuing corporation is widely held and

(a) the "section 306 stock" is not by its terms redeemable for at least five years from the date of issuance; and

(b) it is represented that there will be no redemption of the "section 306 stock", by tender or otherwise, within the five-year period.

.02 A ruling will usually be issued under section 306(b)(4) of the Code to the effect that a distribution of "section 306 stock" (other than a distribution under section 305 of the Code) and the disposition of the "section 306 stock", other than by redemption and other than in anticipation of a redemption, is not pursuant to a plan of tax avoidance if the stock of the issuing corporation is widely held and

(a) the "section 306 stock" is by its terms redeemable within five years from the date of issuance, or

(b) the "section 306 stock" is not redeemable within five years from the date of issuance but the issuing corporation will not represent that there will be no redemption (as a result of a change in the terms of the stock, an invitation for tenders or otherwise) within five years from the date of issuance.

SEC. 6. EFFECT ON OTHER DOCUMENTS.

Sections 3.01-7 and 3.01-8 of Revenue Procedure 64-31, C.B. 1964-2, 947 are hereby amplified with respect to the term "nominal amount" as used in those sections of the Revenue Procedure.

SEC. 7. INQUIRIES.

Inquiries in regard to this Revenue Procedure should refer to its number and should be addressed to the Assistant Commissioner (Technical), Attention: T:I:R, Internal Revenue Service, Washington, D.C. 20224.