Rev. Rul. 57-311: Cross-chain transfer treated as a split-off

Citations: Rev. Rul. 57-311; 1957-2 C.B. 243

Rev. Rul. 57-311

Advice has been requested with respect of the tax consequences of a series of steps by which certain assets and liabilities of a corporation were transferred to a new corporation and one of the shareholders of the transferor corporation terminated his interest in such corporation and acquired all of the stock of the new corporation.

Corporation X , at the time of the transaction in question, had been engaged for more than five years in the active conduct of a business in City M and in the active conduct of a separate business in City O . Approximately 14 percent of the stock of Corporation X was owned by the vice-president, B , who managed and directed the business in City M , and the remainder of the stock was owned by the president, who managed and directed the business in City O .

For bona fide business purposes, it was decided that Corporation X would discontinue operations in City M , and that B would terminate his interest in Corporation X and separately conduct the business in City M through a new corporation.

To carry out these aims, B and Corporation X entered into an agreement, pursuant to which the following steps were taken: (1) Corporation Y was organized; (2) Corporation X redeemed all of B's X stock by distributing to him an amount of cash equal to about ten percent of the value of his shares; (3) the cash distributed to B by X Corporation was in turn transferred by him to Corporation Y in exchange for all of the stock of Y; and (4) Corporation X transferred the operating assets (subject to the liabilities) of the City M business, without consideration, to Corporation Y . The value of the stock of Corporation Y owned by B after the completion of the above-described steps was substantially equivalent to the value of the stock of Corporation X surrendered by him.

After the separation had been effected, Corporation Y actively conducted the business in City M and Corporation X continued the active conduct of the business in City O .

It has been established in a long line of cases that the component steps of a single transaction cannot be treated separately for Federal income tax purposes. See Prairia Oil & Gas Co. v. Motter , 66 Fed.(2d) 309; West Texas Refining & Development Co. v. Commissioner , 68 Fed.(2d) 77; Bassick v. Commissioner , 85 Fed.(2d) 8. It is the opinion of the Internal Revenue Service that, under the rule of these cases, the steps carried out in pursuance of the agreement between B and Corporation X were a single integrated transaction by which Corporation X , in substance and effect, transferred a portion of its assets (including the cash transferred to B and by him transferred to Corporation Y ) to Corporation Y in exchange for all of the stock of Y , and then distributed the stock of Corporation Y to B in exchange for his stock in Corporation X .

In view of the above, the Service holds as follows:

(1) The transfer by Corporation X of a portion of its assets (subject to certain of its liabilities) to Corporation Y in exchange for all of the stock of Corporation Y , followed by the distribution of the Y stock to B , constitutes a reorganization as defined in section 368(a)(1)(D) of the Internal Revenue Code of 1954. No gain or loss is recognized to either Corporation X or Corporation Y . Section 361(a) and 1032(a). Under the provisions of section 362(b) of the Code, the basis to Corporation Y of the assets thus acquired is the same as their basis to Corporation X .

(2) Pursuant to the provisions of section 355(a), no gain or loss is recognized to (and no amount is includible in the income of) B as a result of the receipt by him of all of the stock of Corporation Y in exchange for his stock of Corporation X . Under the provisions of section 358(a), the basis to B of the Y stock received in the exchange is the same as his basis of the X stock surrendered.

(3) The accumulated earnings and profits of Corporation X should be allocated between it and Corporation Y in accordance with the provisions of section 312(i) of the Code.

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