Internal Revenue Service
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 Rev. Rul. 55-59

1955-1 C.B. 35

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

IRS Headnote

A nonstatutory merger between two corporations under certain circumstances for bona fide business reasons will constitute a reorganization within the purview of section 368(a)(1)(C) of the Internal Revenue Code of 1954 and, therefore, a nontaxable exchange as to each corporation and its shareholders under sections 361 and 354 of such Code.

Full Text

Rev. Rul. 55-59

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

The X Corporation is engaged in the business of manufacturing and selling certain products. Its authorized capital consists of 2,500 shares of common stock of which 1,450 shares are outstanding in the hands of the public and 50 shares are held in the treasury of the corporation. Of the treasury stock 35 shares are reserved for options granted to officers and executives of the corporation.

The Y Corporation is engaged in the same business as X Corporation. Its authorized capital consists of 100 shares of preferred stock and 500 shares of common stock. None of the preferred stock has ever been issued. Of the authorized common stock 240 shares are outstanding not including 15 shares which have been reserved for the purpose of Y's restricted stock option plan for key employees. The corporation has outstanding 750 x dollars principal amount of sinking fund debenture bonds.

Pursuant to an agreement between the respective corporations, the X Corporation will acquire the property and assets of the Y Corporation in exchange solely for voting stock of the X Corporation, and the assumption by X of the liabilities of Y, including the outstanding debenture bonds. Furthermore, the X Corporation will change its name to `X-Y Corporation'; reclassify its stock so as to provide for 1,500 authorized shares of voting common stock, having a different par value; issue 300 shares of new common stock in exchange for the 1,500 shares of its old common stock outstanding, the exchange being on a pro rata basis; and make certain other incidental changes in X's articles of incorporation.

The X Corporation will issue to the Y Corporation 350 shares of its new common stock, and will assume the liabilities of Y Corporation in exchange for the property and assets of Y Corporation which will be acquired by X. Upon the receipt by Y of the stock of the X Corporation, the latter corporation will distribute such stock ot its stockholders in exchange for the stock of Y Corporation held by them in the ratio provided by the plan of reorganization. The X Corporation in issuing its new common stock to its own stockholders and to the stockholders of Y Corporation will issue scrip certificates representing fractional shares which will be exchangeable for full shares. Such scrip certificates will become void after a specified date if they are not therefore surrendered. Upon consummation of the transaction the Y Corporation will be liquidated and dissolved.

The purpose of the transaction is to advance the interests of the said corporations by presenting a strengthened organization in a highly competitive industry through a broadened line of products, lower unit costs, and a combination of successful managerial talent.

Section 368 of the Internal Revenue Code of 1954 provides, in part, as follows:

(a) REORGANIZATION.-

(1) IN GENERAL * * * the term `reorganization' means-

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(C) the acquision by one corporation, in exchange solely for all or a part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), of substantially all of the properties of another corporation, but in determining whether the exchange is solely for stock the assumption by the acquiring corporation of a liability of the other, or the fact that property acquired is subject to a liability, shall be disregarded;

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(b) PARTY TO A REORGANIZATION. * * * the term `a party to a reorganization' includes-

(1) a corporation resulting from a reorganization, and

(2) both corporations, in the case of a reorganization resulting from the acquisition by one corporation of stock or properties of another.

Section 361 of such Code in regard to the effects on corporations states, in part:

(a) GENERAL RULE.-No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.

As to the effect on shareholders, section 354 reads, in part:

(a) GENERAL RULE.-

(1) IN GENERAL.-No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.

In the instant case, all requirements of a nontaxable transaction within the meaning of the above sections of the Code have been met. Therefore, no gain or loss will be recognized to either corporation or its stockholders as a result of the reorganization. The basis of the assets of 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 of the new stock of X Corporation in the hands of the stockholders of X Corporation and in the hands of the stockholders of Y Corporation will be the same as the basis of the old stock exchanged therefor. The undistributed earnings and profits of Y Corporation will retain its character for dividends in the X Corporation.