Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 76-13

1976-1 C.B. 96

Section 355 -- Control Firm Stock

IRS Headnote

Business purpose; foreign subsidiary formed to minimize nationalization. The transfer by a foreign subsidiary, due to a program of nationalization commenced in its country of incorporation, of some of its assets to a new subsidiary in another foreign country in exchange for all the new corporation's stock and the immediate distribution of the stock to its domestic parent meets the business purpose requirements of sections 1.355-2(c) and 1.368-1(b) of the regulations.

Full Text

Rev. Rul. 76-13

P, a domestic corporation, owned all of the outstanding stock of S1, which was incorporated under the laws of foreign country X. S1 was engaged in a manufacturing business, through branch operations, in foreign country Y. Country X issued a decree that commenced a program of nationalization directed at foreign owned businesses and income producing assets located in country X. In order to minimize the amount of its assets subject to nationalization, S1 transferred liquid and other movable assets not needed for its operations within country X, to S2, a newly formed wholly owned subsidiary of S1 incorporated in country Y, in exchange for all of the stock of S2. In order to prevent the government of country X from nationalizing the stock of S2 or otherwise obtaining the assets transferred to S2, all the stock of S2 was immediately thereafter distributed to P.

Held, the transfer of assets to S2 was required by business exigencies within the meaning of section 1.368-1(b) of the Income Tax Regulations and the distribution by S1 of the stock of S2 to P was carried out for purposes germane to the business of the corporations within the meaning of section 1.355-2(c) since both the transfer and the distribution were necessitated by the imminent nationalization of the assets transferred. Therefore, the transfer by S1 of assets to S2 is a reorganization within the meaning of section 368(a)(1)(D) of the Internal Revenue Code of 1954 and the distribution by S1 of the S2 stock to P will not be taxable to P under section 355 provided the other requirements of sections 368 and 355, respectively, are met and, pursuant to section 367, it is established to the satisfaction of the Commissioner before the exchanges that neither the transfer nor the distribution is in pursuance of a plan having as one of its principal purposes the avoidance of Federal income taxes.