Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-28

1973-1 C.B. 187

Sec. 368

IRS Headnote

A transaction in which a parent corporation in exchange solely for its voting stock acquires from its wholly-owned first tier subsidiary all the stock of a corporation wholly-owned by the first tier subsidiary qualifies as a reorganization under section 368(a)(1)(B) of the Code.

Full Text

Rev. Rul. 73-28

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.

Corporation X owned all the stock of corporation Y which, in turn, owned all the stock of corporation Z. For valid business reasons, X desired to directly own all the stock of Z. Accordingly, X acquired, in exchange solely for its voting stock, all the stock of Z from Y. The fair market value of the X stock was equivalent to the fair market value of the Z stock as determined by an independent appraiser. There was no arrangement or plan in which the X stock would be reacquired by X in any manner, and Y had no intention of disposing of the X stock.

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).

The X stock received by Y constituted "voting stock" within the meaning of section 368(a)(1)(B) of the Code regardless of whether, by virtue of state law, it may be voted in the hands of Y.

Accordingly, the exchange by X of its voting stock for all of the stock of Z constitutes a reorganization within the meaning of section 368(a)(1)(B) of the Code.

The basis of X in the stock of Z is the same as the basis of Y in the Z stock prior to the exchange, pursuant to section 362(b) of the Code. The basis of Y in the shares of X is Y's basis in the shares of Z surrendered in exchange therefor, pursuant to section 358(a)(1) of the Code.