Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 67-90

1967-1 C.B. 79

IRS Headnote

A contingent contractual right to receive only additional voting stock provided for in a plan of reorganization satisfies the `solely for voting stock' requirement of section 368(a)(1)(B) of the Internal Revenue Code of 1954 where the number of additional shares to be issued is determined by a formula based upon the future market price of the shares of the acquiring corporation.

Full Text

Rev. Rul. 67-90 /1/

Advice has been requested whether the transaction described below satisfies the `solely for voting stock' requirement of section 368(a)(1)(B) of the Internal Revenue Code of 1954.

Corporation X and corporation Y are both publicly held corporations. The stock of each corporation is listed and actively traded on a national stock exchange. Pursuant to a plan of reorganization X will acquire all of the Y stock from the Y shareholders. On the date the plan of reorganization was adopted by X and the Y shareholders the X stock closed at $45 per share and the Y stock closed at $52 per share. After substantial arms-length negotiations the agreed plan of reorganization provides that all of the Y shareholders will exchange all of their 50,000 shares of Y voting stock for 50,000 shares of X voting stock and a contingent contractual right to receive additional X voting stock.

The contingent right to receive additional X voting stock is evidenced only by the plan of reorganization agreed to by the parties, is not evidenced by a negotiable certificate of any kind, is not readily marketable, and can give rise to the receipt of only additional X stock. All additional X stock will be issued 4 years from the date of the initial distribution. All of the stock cannot be issued immediately because the parties are unable to agree on the value of the X stock for purposes of the exchange, notwithstanding that it is listed and traded on a national stock exchange. The maximum number of additional X shares that may be issued to the Y shareholders is 50,000. The plan of reorganization provides that the Y shareholders will receive the additional X shares only if on the fourth anniversary of the initial distribution the closing market price of the X stock is less than $50 per share. If the market price is below $50 per share, X will issue sufficient additional shares (but in no event more than 50,000) so that the total market value of the shares of both the initial and fourth anniversary distributions computed on the basis of the fourth anniversary closing price will equal $2,500,000. Subject to the 50,000 additional share limitation, this formula guarantees the exchanging Y shareholders a $50 per share value for the X stock they receive pursuant to the plan of reorganization.

Section 368(a)(1)(B) of the Code provides that the term `reorganization' includes the acquisition by one corporation, exchange solely for all or a part of its voting stock, of stock of another corporation, if, immediately after the acquisition, the acquiring corporation has control of such other corporation (whether or not such acquiring corporation has control immediately before the acquisition).

Revenue Ruling 66-112, C.B. 1966-1, 68, holds that the `solely for voting stock' requirement of section 368(a)(1)(B) of the Code is satisfied where the number of additional shares to be issued under the provisions of a nonassignable contractual right is determined by a formula contingent upon the future earnings of the acquired corporation. In this case the number of additional shares is contingent upon the future market price of the acquiring corporation's stock. Where the parties are unable to agree on the value of the stock of the acquiring corporation for purposes of the exchange, notwithstanding that the stock is traded on a national stock exchange, a valid business reason exists for issuing less than all of the stock immediately.

Accordingly, in the present case where the parties cannot agree on the value of the X stock, the proposed plan of reorganization satisfies the `solely for voting stock' requirement of section 368(a)(1)(B) of the Code.

The facts of every delayed stock issuance case arising under section 368 of the Code will be carefully examined to insure that bona fide business reasons justify issuing less than all of the stock immediately, and will also be examined to insure that the stock issued is issued solely in exchange for stock or assets, as the case may be, and is in fact not being issued in lieu of other consideration, such as compensation or royalties.

For the effect section 483 of the Code, dealing with interest on certain deferred payments, has on delayed issuance of stock exchanges see sections 1.483-1(b)(6), Example 7; 1.483-1(e)(3), Example 2; and 1.483-2(a)(2) of the Income Tax Regulations.

See further Revenue Procedure 66-34, C.B. 1966-2, 1232 as amplified by Revenue Procedure 67-13, page 590, this Bulletin.

/1/ Also released as Technical Information Release 889, dated Feb. 27, 1967.