Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 55-45

1955-1 C.B. 34

Sec. 354
Sec. 358
Sec. 361
Sec. 362
Sec. 367
Sec. 368
Sec. 381
Sec. 1223

IRS Headnote

Where a plan of reorganization is proposed for bona fide business reasons providing for a statutory merger of two domestic corporations which are wholly owned subsidiaries of a foreign corporation,

Full Text

Rev. Rul. 55-45

Advice has been requested prior to the merger that such transaction is not in pursuance of a plan of tax avoidance under section 367 of the Internal Revenue Code of 1954. The herein described transaction constitutes a nontaxable reorganization within the purview of section 368(a)(1)(A) of such Code.

Advice had been requested with respect to the tax consequences of a proposed reorganization under the following circumstances.

X and Y are both American corporations engaged in the business of manufacturing and selling agricultural implements and are located in different States. Both corporations have both preferred and common stock outstanding. Y Corporation holds about 10 percent of its issued common stock in its treasury.

Both X and Y are wholly owned subsidiaries of Z Corporation, a Canadian corporation.

To promote greater business efficiency and economy in management of X and Y Corporations, a plan of reorganization and agreement of merger is proposed whereby the X Corporation will acquire the business and assets of the Y Corporation through a statutory merger in compliance with the statutes of the respective States in which they are incorporated. Upon completion of the merger, Y Corporation will cease as a separate corporate entity, while the X Corporation will be the surviving and continuing corporation.

Under the plan the articles of incorporation of X will be amended to provide for an increase in its authorized common stock, and newly issued common stock of X will be exchanged for all of the common and preferred stock of Y. The treasury shares held by Y will be cancelled and the name of the surviving corporation will be changed.

The questions presented are (1) whether, under the provisions of section 367 of the Internal Revenue Code of 1954, it is necessary to establish in advance of the transaction that the exchanges to be made are not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income taxes and (2) whether the transfers, exchanges, and the termination of Y's corporate existence will result in recognition of gain or loss to any of the parties involved.

With respect to the first question, section 367 of the Internal Revenue Code of 1954, which relates to foreign corporations, reads in part as follows:

In determining the extent to which gain shall be recognized in the case of any of the exchanges described in section * * * 354, 355, * * * or 361, a foreign corporation shall not be considered as a corporation unless, before such exchange, it has been established to the satisfaction of the Secretary or his delegate that such exchange is not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income taxes * * *.

In the instant case the plan of reorganization as proposed provides for the merger of two domestic corporations all of the stock of which is owned by the same foreign corporation. However, if all of the stock of both corporations were owned by an individual (instead of a corporation) this would not prevent the transaction from being a reorganization under the terms of section 368 of the Code. It is therefore not necessary to establish prior to the merger that it is not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax within the meaning of section 367 of the Code, inasmuch as the transaction has the same effect whether or not the foreign corporation is `considered as a corporation.'

In the instant case, the merger meets the provisions of section 368(a)(1)(A) of the Internal Revenue Code. Both corporations are in the same business and the purpose of the transaction is to promote greater business efficiency and economy in management. Therefore, no gain or loss will be recognized to either corporation or to their stockholder as a result of the merger. The basis of the assets of the Y Corporation acquired by the X Corporation will be the same as the cost or other basis in the hands of Y; and the basis to the stockholder of Y Corporation of the stock of X Corporation received will be the same as the basis of the stock exchanged. In determining the holding period of the new shares, there will be included the period for which the shares exchanged were held. The undistributed earnings and profits of Y Corporation will be deemed to have been received by the X Corporation as of the date of the transfer