Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 69-48

1969-1 C.B. 106

Sec. 368

IRS Headnote

The acquisition of substantially all of the properties of a corporation is not considered to be in exchange solely for voting stock where stock of the acquired corporation was previously purchased for cash pursuant to an overall plan of reorganization.

Full Text

Rev. Rul. 69-48

Advice has been requested whether, under the circumstances described below, the acquisition of substantially all of the properties of a corporation qualifies as a reorganization under section 368(a)(1)(C) of the Internal Revenue Code of 1954.

On January 2, 1964, corporation P adopted a plan for its wholly-owned subsidiary, S, to acquire substantially all the properties of corporation X. This plan was carried out in the series of steps described below.

On January 5, 1964, P purchased for cash 19 percent of the voting stock of X, and acquired options exercisable over a two-year period ending January 1966, to purchase an additional 30 percent of such stock. The stock subject to the option agreement was placed in escrow, and P was granted irrevocable proxies to vote such stock, thereby giving P voting control over 49 per cent of the X stock.

P then exercised its right to vote 49 per cent of the X stock and X's shareholders approve an agreement between P and X, dated November 15, 1965, under which X transferred substantially all of its properties to S in exchange for a block of voting stock of P and the assumption by S of all of X's debts, obligations, and liabilities (except X's reorganization expenses). The liabilities were in excess of twenty percent of the assets. Subsequent to this exchange, X was liquidated, and the P stock was distributed to X's shareholders (one of which was P) in exchange for the surrender and cancellation of all of the X stock. In the distribution P received nineteen percent of the P stock.

Section 368(a)(1)(C) of the Code defines a reorganization as "* * * the acquisition 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 * * *."

The question has been raised whether the acquisition by S of substantially all of X's properties qualifies as a reorganization within the meaning of section 368(a)(1)(C) of the Code.

Revenue Ruling 57-278, C.B. 1957-1, 124, holds that an acquisition by a subsidiary corporation of substantially all of the properties of a second corporation, in exchange for voting stock of the subsidiary's parent corporation, qualifies as a "C" reorganization, despite the fact that prior to this acquisition the parent already owned part of the stock of the second corporation and that after the acquisition the second corporation was liquidated. In that Revenue Ruling the ownership of the second corporation's stock had been acquired in a transaction separate from the acquisition of the second corporation's assets by the subsidiary.

In the instant case the purchase by P of the X stock for cash was an integral step in a preconceived plan to acquire substantially all of the properties of X. Therefore, Revenue Ruling 57-278 is inapplicable to the facts in the instant case, and the consideration for the acquisition of X's properties by S (apart from the assumption by S of X's liabilities) is deemed to be cash in addition to the P voting stock.

Accordingly, the acquisition is not considered to be in exchange solely for voting stock so as to qualify as a reorganization under section 368(a)(1)(C) of the Code.