Rev. Rul. 68-349: Failed 351 exchange inconnection with F reorg

Citations: Rev. Rul. 68-349; 1968-2 C.B. 143

Distinguished by Rev. Rul. 76-123

Rev. Rul. 68-349 Advice has been requested whether the provisions of section 351 of the Internal Revenue Code of 1954 apply to the transfer of property under the circumstances described below.

Individual A owned appreciated property which Y corporation desired to acquire for use in its business. To carry out the transaction a new corporation X was organized and Y transferred all of its assets subject to all of its liabilities to X in exchange solely for voting stock of X . At the same time A transferred to X the appreciated property that Y desired to acquire and also received in exchange solely voting stock of X. A was not in control of X immediately after the transfer within the meaning of section 368(c) of the Code. Y distributed the stock of X received to its shareholders in exchange for their stock of Y . Thereafter X continued the operation of the business formerly conducted by Y .

Section 351(a) of the Code provides, in part, that no gain or loss will be recognized if property is transferred to a corporation by one or more persons soley in exchange for stock or securities in such corporation if immediately after the exchange such person or persons are in control of the corporation.

Section 368(c) of the Code provides that the term `control' means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation.

Section 351(c) of the Code provides the special rule that in determining control for purposes of section 351 of the Code the fact that any corporate transferor distributed part or all of the stock that it receives in the exchange to its shareholders will not be taken into account.

The transfer by A of appreciated property to X and the transfer by Y of all of its assets subject to its liabilities to X were part of one plan. After the transfer, A and the shareholders of Y were in control of X within the meaning of sections 368(c) and 351(c) of the Code. In this case, however, it is apparent that corporation X was organized for the purpose of enabling A to transfer the appreciated assets without the recognition of gain. Therefore, the organization of X is considered under the circumstances to be merely a continuation of corporation Y and the transaction will be so treated for tax purposes. Consequently, the transfer by A to the continuing entity does not come within the provisions of section 351 of the Code inasmuch as A was not in control of such entity as provided in section 368(c) of the Code.

Accordingly, gain will be recognized to A on the transfer of the assets to corporation X in exchange for voting stock of X as provided in sections 1001 and 1002 of the Code. The transfer by Y of all of its properties to corporation X in exchange for voting stock of X and the assumption of Y's liabilities is a reorganization under section 368(a)(1)((F) of the Code and no gain or loss will be recognized to Y or to its shareholders. As provided by section 1032 of the Code, no gain or loss will be recognized to X on the receipt of property in exchange for its stock. The basis to X of the assets transferred by A will be their cost to X as determined under section 1012 of the Code, and the basis to X of the assets transferred by Y will be the same as the basis of such assets in the hands of Y as provided by section 362 of the Code.