Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 72-72

1972-1 C.B. 104

Sec. 368

IRS Headnote

Stock issued subject to a previous arrangement whereby the acquiring corporation's sole shareholder retained the irrevocable right to vote such stock for five years is not "voting stock" within the meaning of section 368(a)(1)(B) of the Code.

Full Text

Rev. Rul. 72-72

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

For valid business reasons corporation X desired to acquire all the stock of corporation Y. Individual A owned all the stock of X. X manufactured metal products and Y was in the home construction business. In order to acquire all the stock of Y, X would have to issue additional voting common stock, so that after the transaction the Y shareholders would own 55 percent of the voting common stock of X. A was concerned about relinquishing control of X to the shareholders of Y who lacked business experience in the metal products manufacturing business. Therefore, X and the shareholders of Y agreed, as part of the overall plan, to an arrangement whereby A would retain an irrevocable right for five years to vote the X stock to be received by the shareholders of Y. The voting restriction imposed by the arrangement was printed on the stock certificates to be issued. On termination of the five year period the shareholders of Y would receive the right to vote their X stock without restriction.

A reorganization as described in section 368(a)(1)(B) of the Code is 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 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).

The arrangement prevented the shareholders of Y from voting their X stock on their own behalf for a period of five years and perpetuated A's voting control over all outstanding stock of X. Such an arrangement is the same as if X issued nonvoting common stock that automatically converted to voting common stock after five years. In either case the X stock is not "voting stock" within the meaning of section 368(a)(1)(B) of the Code.

Accordingly, the transaction does not qualify as a reorganization within the meaning of section 368(a)(1)(B) of the Code. Gain or loss will be recognized to the shareholders of Y on the exchange of their Y stock for X stock.