Internal Revenue Service
Revenue Ruling
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smRev. Rul. 72-30
1972-1 C.B. 286
Sec. 1502
IRS Headnote
Application of the reverse acquisition rules of section 1.1502-75(d)(3) of the regulations where, in a series of transactions, the common parent of one affiliated group acquires over 80 percent of the stock of the common parent of a second affiliated group.
Full Text
Rev. Rul. 72-30
Advice is requested whether acquisition by a common parent corporation of an affiliated group of more than 80 percent of the stock of the common parent of a second affiliated group, under the circumstances described below, was a reverse acquisition within the meaning of section 1.1502-75(d)(3)(i) of the Income Tax Regulations. Advice is also requested regarding the effect of the acquisition on the respective affiliated groups to which the parent corporations belong.
X corporation is the common parent of an affiliated group of corporations which has filed conosildated Federal income tax returns for taxable years immediately preceding the taxable year in question, and, X is required to continue to file conosildated returns in the absence of permission to discontinue such filing.
Y corporation is also the common parent of an affiliated group of corporations (independent of the affiliated group of which X is the common parent). In March, 1970, Y acquired more than 80 percent of the outstanding stock of X as a result of the following series of transactions.
On March 1, 1970, in exchange for Y stock, Y acquired from the partners of partnership M all of the assets and liabilities of partnership M which included (1) a 30 percent stock interest in X, and (2) a 48 percent stock interest in X (which M owned indirectly through 100 percent ownership of partnership L). On March 2, 1970, Y liquidated L and thereby acquired direct ownership of 78 percent of X (30 percent plus 48 percent). Also, on the same day, Y acquired an additional 4 percent of the outstanding stock of X from another unrelated shareholder so that as of March 2, 1970, Y owned 82 percent of the outstanding stock of X. As of the same date, as a result of completion of such transactions, the shareholders of X immediately before the foregoing acquisition owned more than 50 percent of the fair market value of the outstanding stock of Y.
The question is whether Y's acquisition of more than 80 percent of X's outstanding stock, in this case, was in fact an acquisition of Y by X's shareholders under the reverse acquisition rules set forth in section 1.1502-75(d)(3) of the regulations. A further question raised is what is the effect of the acquisition on the respective affiliated groups of which X and Y respectively were common parents before the acquisition.
Section 1.1502-75(d)(3)(i) of the regulations provides, in pertinent part, that if a corporation (first corporation) acquires stock of another corporation (second corporation) and as a result the second corporation becomes (or would become but for the application of this subparagraph) a member of a group of which the first corporation is the common parent in exchange (in whole or in part) for stock of the first corporation, and the stockholders (immediately before the acquisition) of the second corporation, as a result of owning stock of the second corporation own (immediately after the acquisition) more than 50 percent of the fair market value of the outstanding stock of the first corporation, then any group of which the first corporation was the common parent immediately before the acquisition shall cease to exist as of the date of acquisition, and any group of which the second corporation was the common parent immediately before the acquisition shall be treated as remaining in existence (with the first corporation becoming the common parent of the group).
Section 1504(a) of the Internal Revenue Code of 1954 defines "affiliated group" to mean one or more chains of includible corporations connected through stock ownership with a common parent which is an includible corporation if:
(1) Stock possessing at least 80 percent of the voting power of all classes of stock and at least 80 percent of each class of the nonvoting stock of each of the includible corporations (except the common parent corporation) is owned directly by one or more of the other includible corporations; and
(2) The common parent corporation owns directly stock possessing at least 80 percent of the voting power of all classes of stock and at least 80 percent of each class of the nonvoting stock of at least one of the other includible corporations.
In the instant case, on March 1, 1970, Y acquired only 30 percent of X's outstanding stock and accordingly did not control 80 percent of the voting power of X's stock on that date. However, on March 2, 1970, as a result of two additional transactions, Y did acquire more than 80 percent of X's outstanding stock. Further, since Y's acquisition of the additional 52 percent of X's stock one day after acquisition of 30 percent of X's stock would have served no useful purpose, in this case, without the initial X stock acquisition, it is concluded that these transactions must be viewed as one transaction for purposes of applying the reverse acquisition rules of section 1.1502-75(d)(3) of the regulations. See ACF-Brill Motors Co. v. Commissioner, 189 F. 2d 704 (1951), certiorari denied, 342 U.S. 886 (1951); American Bantam Car Co. v. Commissioner, 11 T.C. 397 (1948) affirmed, 177 F. 2d 513 (1949), certiorari denied, 339 U.S. 920 (1950).
Accordingly, it is held that Y's acquisition of more than 80 percent of X's outstanding stock qualifies as a reverse acquisition within the meaning of section 1.1502-75(d)(3) of the regulations as of March 2, 1970. Thus, as of the same date, the affiliated group of which Y was the common parent immediately before the acquisition ceased to exist, and the affiliated group of which X was a member shall be treated as remaining in existence with Y becoming the common parent of the group.