Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 77-83

1977-1 C.B. 139

Section 301
Section 311
Section 482

IRS Headnote

Allocation of income; bargain sale of stock to foreign parent. Notwithstanding the provisions of section 311 of the Code, section 482 may be applied to allocate income to a foreign corporation's domestic subsidiary that, for the purpose of avoiding tax, sold the stock of its wholly owned foreign subsidiaries to its foreign parent at a price that was less than the domestic corporation's basis in the stock and was also less than the stock's fair market value.

Full Text

Rev. Rul. 77-83

Advice has been requested whether section 482 of the Internal Revenue Code of 1954 may be applied under the circumstances described below, in view of the provisions of section 311.

M, a wholly owned domestic subsidiary of foreign corporation X, sold all of the stock of its wholly owned foreign subsidiaries, Y and Z, to X at a price which was less than the fair market value of the stock sold and also less than its adjusted basis. One of the principal purposes of the bargain sale was the avoidance of federal income tax by shifting to foreign corporation X the income that would otherwise be realized by M through its ownership of Y and Z.

Section 301 of the Code provides in general that a distribution of property (as defined in section 317(a)) made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in subsection (c) thereof which relates to the taxability of dividends.

Section 1.301-1(j) of the Income Tax Regulations provides, in part, that if property is transferred in a sale or exchange by a corporation to a shareholder which is a corporation, for an amount less than its fair market value and also less than its adjusted basis, such shareholder shall be treated as having received a distribution to which section 301 of the Code applies.

Section 311 of the Code provides, in general, that no gain or loss shall be recognized to a corporation on the distribution, with respect to its stock, of property.

M contends that the transaction was a bona fide sale of its stock of Y and Z to X. Alternatively, M contends that the transaction is a distribution within the purview of section 311 of the Code, and no gain or loss is recognized by M on the distribution, thus precluding the application of section 482.

Section 482 of the Code provides, in general, that the Secretary may distribute, apportion, or allocate gross income between or among organizations owned or controlled directly or indirectly by the same interests, if the Secretary determines such allocation necessary in order to prevent evasion of taxes or clearly to reflect the income of such organizations.

Section 1.482-1(d)(5) of the regulations provides that section 482 of the Code may, when necessary to prevent the avoidance of taxes or clearly to reflect income, be applied in circumstances described in sections of the Code (such as section 351) providing for nonrecognition of gain or loss. Section 311 is a nonrecognition section and as such comes within the purview of this section of the regulations.

Accordingly, section 482 of the Code may be applied under the circumstances described, despite the provision of section 311 for nonrecognition of gain or loss by a corporation in connection with distributions of property to a shareholder with respect to its stock.