Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 55-91

1955-1 C.B. 364

Sec. 302

Sec. 1202

IRS Headnote

Section 115(g)(3) of the Internal Revenue Code of 1939, relating to the redemption of stock to pay death taxes, applies to amounts distributed in redemption of stock acquired in a nontaxable reorganization under section 112(g)(1)(F) effecting a change only in the name, state of incorporation and the number of shares of the corporate entity where the value of the stock of the former corporation was included in the gross estate of the decedent.

Any gain or loss realized by the estate upon the redemption of the stock will be treated as a capital gain or loss under sections 115(c) and 117 of the Internal Revenue Code of 1939.

Full Text

Rev. Rul. 55-91

Advice has been requested relative to the Federal income tax consequences of a redemption by N Corporation of a part of its stock owned by the estate of A.

Included in the gross estate of A were 120 x shares of the stock of the M Corporation. The value of this stock exceeded 35 percent of the value of the total gross estate. The executors of the estate sold 38 x shares of the stock to the M Corporation in order to obtain funds for the payment of estate and inheritance taxes. A later audit of the estate tax return resulted in the determination of a deficiency in estate tax of 115 x dollars.

Pursuant to a plan of reorganization the M corporation incorporated the N Corporation under the laws of another State. Under the agreement between the two corporations, all the assets and liabilities of the M Corporation were transferred to the N Corporation in exchange for all of the issued and outstanding capital stock of N Corporation, which consisted of 10,000 x shares. After the transfer, the M Corporation distributed 5 x shares of N Corporation's stock in exchange for each of its 210 x outstanding shares.

As a result of the reorganization, the estate of A received 410 x shares of stock of the N Corporation in exchange for the remaining 83 x shares of stock of the M Corporation that it owned.

The estate had no assets other than the stock of the N Corporation from which it could realize funds to pay the estate tax deficiency and interest thereon. Pursuant to an agreement the N Corporation redeemed a sufficient number of its shares of stock held by the estate of A for the estate to realize cash equal to, but not in excess of, the aggregate amount of the estate and inheritance taxes imposed upon the estate.

Section 115(g)(1) of the Internal Revenue Code of 1939 provides, in general, that if a corporation cancels or redeems its stock at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend.

Section 115(g)(3) of the Code, with reference to the redemption of stock to pay death taxes, provides that the general rule in subsection 115(g) shall not apply to such part of any amount so distributed with respect to stock the value of which is included in determining the value of the gross estate of a decedent, as is distributed after such decedent's death and within the period of limitations for the assessment of estate tax or within 90 days after the expiration of such period, and as is not in excess of the estate, inheritance, legacy, and succession taxes (including any interest collected as part of such taxes) imposed because of such decedent's death; provided, that the value of the stock in such corporation, for estate tax purposes, comprises more than 35 per centum of the value of the gross estate of such decedent.

The stock of the M Corporation was the stock the value of which was included in the gross estate of A for estate tax purposes. However, inasmuch as the stock of the N Corporation was received in a nontaxable reorganization which changed only the name of the M Corporation, the state of incorporation, and the number of shares of the corporate entity, the stock of the N Corporation is in substance the same as the stock of the M Corporation, the value of which was included in the gross estate of the decedent.

Accordingly, it is held that, under the provisions of section 115(g)(3) of the Code, the redemption by the N Corporation, within the time limit prescribed, of shares of its stock held by the estate of A is not equivalent to the distribution of a taxable dividend, since the value of the stock of the M Corporation (now N Corporation), for estate tax purposes, comprised more than 35 per centum of the value of the gross estate of the decedent, and the amount of this distribution and previous distributions to the estate of A did not exceed the estate, inheritance, legacy, and succession taxes (including interest collected as a part of such taxes) imposed upon the estate of A.

Any gain or loss realized by the estate upon the redemption of the stock will be treated as a capital gain or loss under sections 115(c) and 117 of the Code