Rev. Proc. 77-4

Section 1. Purpose.

The purpose of this Revenue Procedure is to clarify Rev. Proc. 75-29, 1975-1 C.B. 754, as modified by Rev. Proc. 76-4, 1976-1 C.B. 543, and as amplified by Rev. Proc. 76-24, 1976-1 C.B. 563, which sets forth changes in the closing agreement that the Internal Revenue Service will generally enter into in certain transactions as a condition to issuing favorable rulings pursuant to section 367 of the Internal Revenue Code of 1954.

Sec. 2. Implementation.

Section 3 of Rev. Proc. 75-29, which describes the difference between the old type of closing agreement and the new type of closing agreement, states, in part, that "Unlike the previous type of closing agreement, the amount of 'pre-reorganization earnings' is not locked in." This statement is not intended to mean that the pre-reorganization earnings and profits of the acquired corporation that are required to be included in income by the shareholders of the acquired corporation under the terms of the old type closing agreement can never be considered as reduced by dividends paid by the acquiring corporation that are attributable to the earnings and profits of the acquired corporation. The Service does not intend to tax the same shareholder twice on the same earnings and profits of the acquired corporation. Therefore, provided the former shareholders of the acquired corporation include in income the dividends paid by the acquiring corporation out of the "pre-reorganization" section 1248 earnings and profits of the acquired corporation, the earnings and profits that are required to be included in income under the terms of the closing agreement will be considered to have been reduced by such amount.

Sec. 3. Effect on Other Documents.

Rev. Proc. 75-29 is clarified.