Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 79-71

1979-1 C.B. 151

Section 368

IRS Headnote

Reorganization; merger; leasing activity terminated. A service corporation and a corporation engaged solely in the business of leasing a building to the service corporation each owned equally by the same two shareholders were merged into a new corporation that continued unchanged the service business in the same building now owned by the new corporation. The shareholders' stock was exchanged for identical stock in the new corporation. The merger satisfies the requirements of Rev. Rul. 75-561 for a reorganization under section 368(a)(1)(F) of the Code even though the leasing corporation's leasing activities were terminated by the merger.

Full Text

Rev. Rul. 79-71

ISSUE

Are the requirements of Rev. Rul. 75-561, 1975-2 C.B. 129, for a reorganization pursuant to section 368(a)(1)(F) of the Internal Revenue Code of 1954 satisfied when a service corporation and a corporation engaged solely in the business of leasing facilities to the service corporation are merged into a new corporation?

FACTS

X was a state M service corporation whose only class of stock, voting common stock, was owned equally by A and B. Y was a state M corporation engaged solely in the business of leasing to X the building that Y owned and in which X carried on its service operations. A and B equally owned Y's only class of stock, voting common stock. In January 1977, X and Y were merged with and into a new corporation (Newco) pursuant to the law of state M. The X and Y common stock held by A and B was exchanged for Newco voting common stock of equivalent value. Newco continued unchanged the service business of X in the building formerly leased by X from Y that Newco now owned.

LAW AND ANALYSIS

The applicable section of the Code is section 368(a)(1)(F).

Section 368(a)(1)(F) of the Code provides that the term reorganization means a mere change in identity, form, or place of organization, however effected.

Rev. Rul. 75-561 provides that the combination of two or more corporations may qualify as a reorganization within the meaning of section 368(a)(1)(F) of the Code if (1) there is complete identity of shareholders and their proprietary interests in the transferor corporations and acquiring corporations; (2) the transferor corporations and the acquiring corporation are engaged in the same business activities or integrated activities before the combination; and (3) the business enterprise of the transferor and the acquiring corporations continues unchanged after the combination.

In the present case, requirement (1) of Rev. Rul. 75-561 regarding qualification as a reorganization under section 368(a)(1)(F) of the Code has been met. A and B have common stock in Newco completely identical to that held in X and Y. Requirement (2) is satisfied because the activities of X and Y were integrated prior to the merger. Y provided the facilities in which X carried on its service operations. The question then remains whether requirement (3), the unchanged continuation of the business enterprise of X and Y, has been met when Y's leasing activities have been terminated by the merger. Such requirement has been satisfied because Newco continues X's service operations. In addition, although Y no longer leases the building to X, Y's principal premerger activity, the providing of a building as a service facility continues after the merger.

HOLDING

The merger of X and Y into Newco satisfies the requirements of Rev. Rul. 75-561 for a reorganization under section 368(a)(1)(F) of the Code.