Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 58-54

1958-1 C.B. 181

Caution: Obsoleted by Rev. Rul. 76-566

IRS Headnote

Where a corporation which operates a soft drink bottling and distributing business, transfers the portion of its assets applicable to its distributing operations at three locations to three new corporations in exchange for their capital stock, followed by a distribution of such stock to its stockholders, such distribution does not qualify as a tax-free distribution within the purview of section 355 of the Internal Revenue Code of 1954, since the activities in all the locations constitute an integral part of only one enterprise. Hence, the distribution of such stock in the three new corporations to the shareholders of the original corporation is treated as a dividend to the extent provided in sections 301(c) and 316 of the Code.

Full Text

Rev. Rul. 58-54

Advice has been requested as to the Federal income tax consequences of the transfer by a corporation of property to three new corporations in exchange for their stock and the distribution of such stock to its shareholders.

The corporation operates a soft drink bottling and distributing business. Its franchise for distribution covers four towns within the area of a certain State. Although the beverage was actually bottled in each of these localities for a number of year, all of the bottling has been done at the main plant in recent years. A warehouse for the storage and distribution of beverage has been maintained at each of the localities. Each of these branches has sold, rented, and serviced coolers in addition to selling and distributing the beverage. Gross sales of bottled beverage in the locality of the main plant have averaged 53 percent of the corporation's total sales in recent years, the remaining 47 percent of the sales being made in the three other localities. About 91 percent of the total assets of the corporation are attributable to the operation of the main plant and to the distribution facilities of the corporation in that locality.

The corporation desired to separate the properties used in the business according to the four localities. Accordingly, assets of the corporation applicable to the operations of the three branches were transferred to three new corporations, one for each area served, in exchange for their capital stock. The stock of these three new corporations then was distributed to the shareholders of the original corporation on a pro rata basis.

Thereafter, the original corporation bottled and distributed such beverage for the territory in and around the main plant, while the three new corporations distributed the beverage in their respective areas. The original corporation supplies the new corporations with bottled beverage for a reasonable charge, since this work can be accomplished more economically at the main bottling plant.

Section 355 of the Internal Revenue Code of 1954 provides, in part, that if a corporation distributes to a shareholder solely stock of another corporation which it controls immediately before the distribution, then no gain or loss shall be recognized to such shareholder on the receipt of such stock.

The above section, however, is applicable only if the distributing corporation and each of the controlled corporations is engaged, immediately after the distribution, in the active conduct of an existing trade or business which has been in operation for at least five years. Section 355 does not apply to the division of a single business. See section 1.355-1(a) of the Income Tax Regulations.

In regard to the meaning of the term "active business," section 1.355-1(c) of the regulations states, in part, that a trade or business consists of a specific existing group of activities being carried on for the purpose of earning income or profit from only such group of activities, and the activities included in such group must include every operation which forms a part of, or a step in, the process of earning income or profit from such group.

Where a corporation is engaged in one particular trade or business, the manufacturing activities and the sales activities of that business do not constitute separate businesses. The manufacturing and selling operations constitute only an integrated business, as illustrated by example (11) of section 1.355-1(d) of the regulations. The operation of the same type of business in different states or localities is considered a separate business in each area only if they are independent of each other. See Rev. Rul. 56-344, C. B. 1956-2, 195.

In the instant case, the original corporation manufactured and sold only one product. All of the soft drink beverages were bottled at one location, i. e., the main plant, although sold or distributed through warehouses and other distribution facilities located in four localities. There was one business, the manufacture and sale of one product within a certain area. Accordingly, the selling or distributing activities of the one business did not constitute a separate business or businesses despite some geographical differences in warehouse locations. They all formed part of one integrated business wherein the product was manufactured in one place, although distributed through several warehouse points. See Rev. Rul. 56-287, C. B. 1956-1, 186.

In view of the foregoing, it is held that the distribution of the stock of the three new corporations to the stockholders of the original corporation does not qualify as a transaction coming within the purview of section 355 of the Code. However, no gain or loss is recognized, under the provisions of section 351 of the Code, to the original corporation upon the transfer of a part of its property to the three new corporations solely in exchange for all the stock in such corporations. The distribution of stock in the three new corporations to the shareholders of the original corporation constitutes a dividend to the recipients under the provisions of section 301(c) of the Code to the extent provided in section 316 thereof.