Rev. Rul. 73-54: Valid C reorg despite payment of reorg expenses

Citations: Rev. Rul. 73-54; 1973-1 C.B. 187

Rev. Rul. 73-54

Advice has been requested whether the payment or assumption by the acquiring corporation of valid reorganization expenses of the acquired corporation or its shareholders violates the "solely for voting stock" requirement of section 368(a)(1)(C) of the Internal Revenue Code of 1954.

Pursuant to a plan of reorganization, X corporation proposes to transfer substantially all of its properties to Y corporation in exchange for shares of voting stock of Y followed by the distribution of the Y stock to the shareholders of X in the dissolution of X. As part of the plan of reorganization Y agrees to pay or assume certain expenses. These expenses are legal and accounting expenses; appraisal fees; administrative costs of the acquired corporation directly related to the reorganization such as those incurred for printing, clerical work, telephone and telegraph; security underwriting and registration fees and expenses; transfer taxes, and transfer agents' fees and expenses. These expenses are solely and directly related to the reorganization.

In order to satisfy the definition of a reorganization under section 368(a)(1)(C) of the Code, the consideration to be transferred by the acquiring corporation must consist solely of all or a part of its voting stock (or voting stock of a corporation which is in control of it). Thus, an acquisition of property for all or a part of the acquiring corporation's voting stock and other property cannot qualify under section 368(a)(1)(C) unless section 368(a)(2)(B) applies. As the Supreme Court of the United States stated in Helvering v. Southwest Consolidated Corp., 315 U.S. 194 (1942), Ct. D. 1544, 1942-1 C.B. 218 at 220:

"'Solely' leaves no leeway. Voting stock plus some other consideration does not meet the statutory requirement."

In Southwest Consolidated Corp., the Court held that the "solely for voting stock" requirement is violated where the acquiring corporation directly or indirectly transfers to the acquired corporation or its shareholders property other than voting stock in exchange for the equity interest being acquired.

However, in several court decisions, payments by the acquiring corporation of expenses arising in a reorganization have been held not to represent additional consideration (see Claridge Apartments Co. v. Commissioner, 1 T.C. 163 (1942), acquiescence, 1943 C.B. 4, reversed on other issues 138 F.2d 962 (1943), reversed on other issues, 323 U.S. 141 (1944); Alcazar Hotel, Inc. v. Commissioner, 1 T.C. 872 (1943), acquiescence, 1943 C.B. 1; New Jersey Mortgage & Title Co. v. Commissioner, 3 T.C. 1277 (1944), acquiescence 1945 C.B. 5; Roosevelt Hotel Co. v. Commissioner, 13 T.C. 399 (1949), acquiescence 1950-1 C.B. 4).

Although the acquired corporation and its shareholders are relieved of the reorganization expenses otherwise attributable to them, nevertheless, they will be receiving solely voting stock of the acquiring corporation. They will receive no other consideration from the transferee in exchange for the transferor's property.

Accordingly, it is held that the payment or assumption by the acquiring corporation of the valid reorganization expenses in the instant case will not prevent the plan from satisfying the definition of a reorganization under the above provision of the Code. Pursuant to the provisions of section 361(a) and section 354(a)(1) of the Code no gain or loss will be recognized to the acquired corporation or its shareholders, respectively. The principles of this Revenue Ruling are equally applicable to such valid reorganization expenses that are paid or assumed by an acquiring corporation in a reorganization described in section 368(a)(1)(B) of the Code. Valid reorganization expenses which may be paid or assumed by an acquiring corporation without violating the solely for voting stock requirement of section 368(a)(1)(B) or (C) of the Code are not necessarily limited to those involved in the instant case.

Expenses that are not solely and directly related to the reorganization, the transfer of the property of the acquired corporation for stock of the acquiring corporation, or the exchange of the equity interests of the shareholders of the acquired corporation for stock of the acquiring corporation, are other property if paid or assumed by the acquiring corporation and will prevent the transaction from satisfying the solely for voting stock requirement of section 368(a)(1)(B) or (C) of the Code. Examples of such expenses are fees incurred for investment or estate planning advice and those incurred by an individual shareholder, or group of shareholders, for legal, accounting or investment advice or counsel pertaining to participation in, or action with respect to, the reorganization. In addition, where the obligation to pay an applicable state transfer tax is solely that of a shareholder, payment or assumption of such tax by the acquiring corporation will violate the solely for voting stock requirement of section 368(a)(1)(B) or (C) of the Code. Further, this ruling is not applicable and the transaction will not qualify under section 368(a)(1)(B) or (C) of the Code to situations in which there is a transfer by the acquiring corporation of cash or property other than voting stock to the acquired corporation or its shareholders with the intention that the acquired corporation or its shareholders will pay expenses of the acquired corporation or its shareholders even though they are solely and directly related to the reorganization.

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