Rev. Rul. 80-46

1980-1 C.B. 62, 1980-8 I.R.B. 8.

                       Internal Revenue Service
                                 Revenue Ruling

     ACQUISITION TO AVOID TAX; REORGANIZATION; CONTROL; ATTRIBUTION OF SOLE
                                 OWNER'S STOCK

                          Published: February 25, 1980

Section 296.--Acquisitions Made to Evade or Avoid Income Tax, 26 CFR 1.269-1: Meaning and use of terms.

  Acquisition to avoid tax; reorganization; control; attribution of sole owner's stock. An acquired corporation owned all the stock of two sibsidiary corporations. The acquiring corporation, owning 45 percent of the stock of the acquired corporation before the merger, did not have control of the acquired corporation under section 269 of the Code where the acquiring, corporation's sole stockholder also owned 10 percent of the stock of the acquired corporation because the attribution rules of constructive ownership do not apply. The acquiring corporation has acquired control of the acquired corporation's subsidiaries.

ISSUE

  Has the taxpayer acquired control of any corporation within the meaning of section 269(a)(1) of the Internal Revenue Code, under the circumstances described below?

FACTS

  The taxpayer, M corporation, owned 45 percent of the stock of X corporation.  A, an individual, owned 10 percent of the stock of X and 100 percent of the stock of M.  The balance of the X stock was owned by unrelated third parties. The assets of X consisted solely of 100 percent of the stock of both Y corporation and Z corporation.

  In June 1975, X was merged into M under the laws of state T. Pursuant to the merger agreement, all the stock of Y and Z was transferred to M.  The transaction qualified as a statutory merger within the meaning of section 368(a)(1)(A) of the Code.  Y and Z became subsidiaries of M and filed consolidated federal income tax returns with M for years subsequent to the merger.

  The principal purpose of the merger was to avoid federal income tax by securing the benefit of a deduction, credit, or other allowance that M would not otherwise have enjoyed.

  The specific questions presented are (1) whether the X stock owned directly by A before the merger can be attributed to M so that M had control of X before the merger and therefore did not acquire it within the meaning of section 269(a)(1) of the Code, and if not, (2) whether the acquisition of Y and Z stock pursuant to a statutory merger under section 368(a)(1)(A) is an acquisition of control within the meaning of section 269(a)(1).

LAW AND ANALYSIS

  Section 269(a) of the Code provides that if--

    (1) any person or persons acquire, or acquired on or after October 8, 1940, directly or indirectly, control of a corporation, or

    (2) any corporation acquires, or acquired on or after October 8, 1940, directly or indirectly, property of another corporation, not controlled, directly or indirectly, immediately before such acquisition, by such acquiring corporation or its stockholders, the basis of which property in the hands of the acquiring corporation, is determined by reference to the basis in the hands of the transferor corporation,

and the principal purpose for which such acquisition was made is evasion or avoidance of federal income tax by securing the benefit of a deduction, credit, or other allowance that such person or corporation would otherwise enjoy, then the Secretary may disallow such deduction, credit, or other allowance.  For purposes of paragraphs (1) and (2), control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of stock of the corporation.

  Section 1.269-2(b) of the Income Tax Regulations provides that amounts otherwise constituting a deduction, credit, or other allowance will be disallowed under section 269 of the Code when the effect of the deduction, credit or other allowance would be to distort the liability of the taxpayer when the 'essential nature' of the transaction or situation is examined in the light of the basic purpose or plan that the deduction, credit or other allowance was designed by the Congress to effectuate.

  Section 1.269-3 of the regulations provides that if either section 269(a)(1) or (a)(2) of the Code is applicable because the principal purpose of the acquisition was to evade or avoid federal income tax, it is immaterial by what method or by what conjunction of events the benefit was sought.

  In Brick Milling Company v. Commissioner, T.C. Memo 1963-305, during 1956 two brothers acquired direct control of a manufacturing corporation that had net operating losses for several years before the acquisition.  About a year before the acquisition, the

brothers incorporated their family partnership, which operated several mills in the same area as the acquired manufacturing corporation.  On October 23, 1957, the brothers transferred their stock in the manufacturing corporation to the milling corporation, which immediately liquidated the manufacturing corporation and received all of its assets in distribution.  For its taxable years ending March 31, 1958, and 1959, the milling corporation deducted the net operating losses of the manufacturing corporation.  The losses were disallowed under section 269 of the Code.

  The court found that since the brothers had control of both corporations prior to the liquidation of one into the other, section 269(a)(2) of the Code was inapplicable.  The milling corporation contended that section 269(a)(1) was also inapplicable because it had indirect control of the liquidated manufacturing corporation prior to the contribution of that corporation's stock to its capital by the brothers.  The pre-existing indirect control purportedly arose because the stock ownership of the brothers in the liquidated corporation should be attributed to the milling corporation.  As a result, the milling corporation contended that it did not acquire control of the liquidated corporation immediately prior to the liquidation.  In reply, the court said that the attribution rules of section 318 do not apply in determining control within the meaning of section 269 because section 318 applies only to subchapter C of the Code and section 269 is in subchapter B. No other provisions of the Code would attribute ownership of the manufacturing corporation stock to the milling corporation.  The court also said that section 269 applies to the acquisition of control of one corporation by another corporation even if both are owned by the same shareholder. The court held, therefore, that section 269(a)(1) applied to the acquisition by the milling corporation of the controlling stock interest of the manufacturing corporation.

  In the present situation, M directly owned only 45 percent of X and thereby indirectly owned only 45 percent of Y and Z before the merger.  The 10 percent interest in X held by A cannot be attributed to M because there are no rules of constructive ownership of stock expressly made applicable to section 269 of the Code.

  Further, while the merger may properly by characterized as a transfer of property for purposes of section 368(a)(1)(A) of the Code, this characterization does not limit the application of section 269(a)(1). Section 269(a)(1) refers to the acquisition of control of a corporation.  It is immaterial how that control is acquired.  In the present situation, X transferred all of the stock of Y and Z to M.  Thus, the essential nature of the transaction is that M acquired control of Y and Z upon the merger of X into M.

HOLDING

  Because the X stock owned by A is not attributed to M, M did not have control of X, Y, or Z within the meaning of section 269(a)(1) of the Code before the merger of X into M.  Therefore, M acquired control of Y and Z, the subsidiaries of X, within the meaning of section 269(a)(1).

Rev. Rul. 80-46, 1980-1 C.B. 62, 1980-8 I.R.B. 8.