Internal Revenue Service
Revenue Ruling
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smRev. Rul. 55-36
1955-1 C.B. 340
Sec. 351
IRS Headnote
Where a shareholder owning 1/6 of the capital stock of X Corporation organized a new corporation and transferred his shares in exchange for debenture bonds and stock of the new corporation and then donated his stock to a tax-exempt corporation which subsequently liquidated the new corporation, the consummated plan lacks substance and reality and the transfer by the shareholder of his stock to the new corporation is not a transaction within the purview of section 112(b)(5) of the Internal Revenue Code of 1939.
Full Text
Rev. Rul. 55-36
Advice has been requested with respect to the treatment for Federal income tax purposes of a consummated transaction involving an exempt corporation, a new corporation, and a certain shareholder of an old corporation.
The X Corporation has outstanding 300 shares of capital stock. An individual stockholder owned 50 shares of the corporation, having a value in excess of 3,000 x dollars and had a basis to him for determining gain or loss of 1,000 x dollars.
The shareholder proposed to make a substantial contribution to Y Corporation, an organization exempt for Federal income taxation. To that effect, the following plan was executed:
(1) As an individual, he organized a new corporation, Z, to which he transferred his shares of stock of X Corporation in exchange for debenture bonds having a face value in the amount of the value of the stock of X Corporation transferred to the Z Corporation, and stock of Z Corporation. The bonds would mature in 12 years and bear interest at the rate of 1 percent per annum. The stock issued by Z Corporation was without par value.
(2) The individual donated his stock in Z Corporation to Y Corporation.
(3) The Z Corporation, now a wholly-owned subsidiary of the Y Corporation, liquidated, and all of its assets (stock of X Corporation) were distributed to Y Corporation in exchange for the stock of Z Corporation. Y Corporation assumed the liability for the payment of the bonds issued by Z Corporation.
(4) X Corporation was then liquidated and the Y Corporation received a pro rata share of the assets of X in exchange for the stock of that corporation.
(5) The shareholder from time to time will donate to the Y Corporation such amounts of the bonds of the Z Corporation as he deems advisable.
It is stated the foregoing plan has been consummated in order that such donations will be made without income tax liability to the individual and in such a manner as to enable him to spread the donation over a number of years.
Section 112 of the Internal Revenue Code of 1939 provides, in part, as follows:
(b) EXCHANGES SOLELY IN KIND.-
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(5) TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR.-No gain or loss shall be drecognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; * * *
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(h) DEFINITION OF CONTROL.-As used in this section the term `control' means the ownership of stock possessing at least 80 per centum of the total combined voting power of all classes of stock entitled to vote and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.
In the instant case the transaction served no corporate business purpose for the transfer fo the stock of X Corporation to the Z Corporation. See Evelyn F. Gregory v. Helvering , 293 U.S. 465, Ct. D. 911, C.B. XIV-1, 193 (1935). The Z Corporation did not engage in the conduct of any trade or business and did not remain in existence, except for a brief time as was necessary to implement the donation of X Corporation's stock to the Y Corporation. Furthermore, the individual shareholder was not in control of the Z Corporation within the meaning of section 112(h). of such Code, since his ownership of the stock was only transitory and the object of the plan was to place control in the hands of the Y Corporation.
Accordingly, it is held that the consummated plan, insofar as it pertains to Z Corporation, was lacking in substance and reality, and that the transfer by the individual shareholder of his stock of the X Corporation to the Z Corporation was not a transfer to a corporation controlled by the transferors within the meaning of section 112(b)(5) of the Internal Revenue Code of 1939