Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 70-65

1970-1 C.B. 77

Sec. 368

IRS Headnote

The "solely for voting stock" requirement of section 368(a)(1)(B) of the Code is not satisfied where a corporation acquires, in two separate transactions, sixty percent of another's stock in a stock for assets exchange plus assumption of liabilities, and forty percent in a stock-for-stock exchange.

Full Text

Rev. Rul. 70-65

Advice has been requested whether, under the circumstances described below, the acquisition of all the stock of a corporation is a reorganization within the meaning of section 368(a)(1)(B) of the Internal Revenue Code of 1954.

X and Y are corporations each actively engaged in business. Sixty percent of the outstanding stock of Y is owned by Z corporation and the balance of the Y stock is held by unrelated individuals. For good business reasons X proposed to acquire one hundred percent ownership of the outstanding stock of Y. In order to accomplish this purpose, X acquired all of the assets of Z (which included the sixty percent of Y's outstanding stock) in exchange solely for its own voting stock and X assumed all of Z's liabilities. X then exchanged shares of its own voting stock for the remaining forty percent of the outstanding shares of Y stock held by the other Y shareholders.

Section 368(a)(1)(B) of the Code provides, in part, that the term "reorganization" means the acquisition by one corporation in 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 had control immediately before the acquisition).

Section 368(c) of the Code states that, for purposes of section 368(a)(1)(B) of the Code, "control" means the ownership of stock possessing at least eighty percent of the total combined voting power of all classes of stock entitled to vote and at least eighty percent of the total number of shares of each other class of stock of the corporation.

After completion of all the exchanges described above, X was in control of Y for purposes of section 368(a)(1)(B) of the Code since X owned all of the stock of Y. The question arises, however, whether all of the stock of Y was acquired solely in exchange for voting stock of X.

Sixty percent of the stock of Y, as well as all other assets of Z, were acquired by X for voting stock of X plus the assumption by X of certain liabilities of Z. Therefore, the stock of Y was not acquired solely in exchange for X voting stock as required by section 368(a)(1)(B) of the Code. Accordingly, it is held that the acquisition by X of all of the stock of Y is not a reorganization as defined in section 368(a)(1)(B) of the Code. Furthermore, the acquisition of forty percent of the stock of Y does not qualify as a reorganization under section 368(a)(1)(B) of the Code since that acquisition was a part of an overall plan that included the acquisition of the stock (sixty percent) held by Z.

On the other hand, the acquisition of sixty percent of the stock of Y as part of the assets of Z comes within the scope of section 368(a)(1)(C) of the Code which provides, in part, that a reorganization under this subsection includes the acquisition by one corporation in exchange solely for all or a part of its voting stock, of substantially all of the properties of another corporation, but in determining whether the exchange is solely for stock the assumption by the acquiring corporation of a liability of the other, or the fact that property acquired is subject to a liability, shall be disregarded. Section 368(a)(1)(C) of the Code provides that the assumption of a liability may be disregarded only for this purpose.

Based on the foregoing conclusions, gain or loss will be recognized to the individual shareholders of Y on the exchange of their Y stock for stock of X.