Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 59-84

1959-1 C.B. 71

Sec. 306

Full Text

Rev. Rul. 59-84

For bona fide business reasons a corporation issued new common and new non-voting, non-participating, cumulative preferred stock for all its old common stock in a recapitalization. For each share of the old common stock surrendered either one share of the new common or one share of the new preferred was received. The old common, the new common and the new preferred all had the same fair market value per share at the time of the exchange. In the exchange some of the 10 shareholders received only new common or preferred while others received shares of both issues. The entire stock ownership in the corporation before and after the recapitalization exchanges was as follows:

====================================================================
                                                            % OF
SHAREHOLDERS     SURRENDERED         RECEIVED           COMMON SHARES
____________________________________________________________________
                               New        New
(All unrelated)    Common     common   preferred    Before     After
                   shares     shares     shares    exchange   exchange
______________________________________________________________________
A...............    2,790      None       2,790        55.8      None
B...............      470        80         390         9.4       8.0
C...............      440        80         360         8.8       8.0
D...............      360       100         260         7.2      10.0
E...............      280       150         130         5.6      15.0
F...............      220       150          70         4.4      15.0
G...............      140       140        None         2.8      14.0
H...............      140       140        None         2.8      14.0
K...............      140       140        None         2.8      14.0
M...............       20        20        None          .4       2.0
                  ____________________________________________________
     Totals.....    5,000     1,000       4,000       100.0     100.0
______________________________________________________________________

Held, the recapitalization constitutes a reorganization under section 368(a)(1)(E) of the Internal Revenue Code of 1954 and the exchanges of stock are nontaxable under section 354(a)(1) of such Code. The preferred stock received by A is not section 306 stock since after the exchange he owns no common stock, no voting stock and no participating stock. On the other hand, after the transaction each of the other shareholders ( B, C, D, E and F ) who received preferred stock owns a percentage interest in the common stock equity which is greater or not substantially less than his percentage interest in such equity before the transaction. In these circumstances the transaction is substantially the same as the receipt of a stock dividend under section 306(c)(1)(B) of the 1954 Code. The preferred stock received by B, C, D, E and F is therefore section 306 stock.

Preferred stock of a new corporation issued to a majority stockholder in exchange for his common stock of an old corporation in a `split-off' reorganization as defined in section 368(a)(1)(D) of the Code. See Rev. Rul. 59-197, page 77.