Rev. Rul. 81-92

1981-1 C.B. 133, 1981-12 I.R.B. 6.

                       Internal Revenue Service
                                 Revenue Ruling

                    REORGANIZATION;  CONTINUITY OF BUSINESS

                           Published: March 23, 1981

26 CFR 1.368-1: Purpose and scope of exception of reorganization exchanges

  Reorganization; continuity of business. A manufacturing corporation sold all of its assets for cash to an unrelated corporation as part of a plan of reorganization in which a third corporation acquired all of the manufacturing corporation's outstanding stock in exchange solely for its own voting stock. The manufacturing corporation, as a wholly owned subsidiary, then used the cash realized on the sale to engage in a new business.  The acquisition of the manufacturing corporation's stock solely for the voting stock does not qualify as a tax-free reorganization under section 368(a)(1)(B) of the Code.

ISSUE

  Does the acquisition by one corporation of all of the stock of another corporation solely in exchange for voting stock of the acquiring corporation qualify as a tax-free reorganization under section 368(a)(1)(B) if the acquired corporation's assets consist solely of cash that it realized from the sale of assets it previously used in its manufacturing business?

FACTS

  T, a corporation engaged in manufacturing, sold all of its assets for cash to Z, an unrelated corporation.  The sale was made as part of a plan to reorganization in which P, a corporation engaged in the manufacture of products different than those previously manufactured by T, acquired all of the outstanding stock in T from T's shareholders, in exchange solely for P voting stock.  T, as a wholly owned subsidiary of P, then used the cash realized on the sale of its manufacturing assets to engage in a business entirely unrelated to its previous manufacturing business.

LAW AND ANALYSIS

  Section 368(a)(1)(B) of the Code provides, in pertinent part, that the term  "reorganization" means the acquisition of one corporation, in exchange solely for shares of its voting stock, of the outstanding stock of another corporation if, immediately after the transaction, the acquiring corporation has control of such other corporation.

  Section 1.368-1(b) of the Income Tax Regulations states that in order for a reorganization to qualify under section 368(a)(1) of the Code there must be a continuity of the business enterprise under the modified corporate form.

  Section 1.368-1(d) of the regulations provides, in general, that the continuity of business enterprise requirement of section 1.368-1(b) is satisfied if the transferee in a corporate reorganization either (i) continues the transferor's historic business of (ii) uses a significant portion of the transferor's historic business assets in a business.  Because the continuity of business enterprise requirement must be met for a transaction to qualify as a reorganization, section 1.368-1(d) is applicable to a transaction intended to qualify as a tax free reorganization under section 368(a)(1)(B) of the Code. See section 1.368-1(d)(1)(iii).  Therefore, the transferee corporation must continue the transferor's historic business, or continue to use a significant portion of the transferor's historic business assets, in modified corporate form as a subsidiary of the transferee corporation for the transaction to qualify under section 368(a)(1)(B).

HOLDING

  In the instant transaction, the acquisition by P of the T stock solely for P's voting stock does not qualify as a tax-free reorganization under section 368l(a)(1)(B) since P did not continue T's historic (the manufacturing) business or use a significant portion of T's historic business assets (those used in the manufacturing business) in a business conducted as a subsidiary of P after the transaction.

  Accordingly, gain or loss is realized and recognized to the former shareholder of T upon the receipt by them from P of the P voting stock in exchange for their T stock under section 1001 of the Code.

EFFECTIVE DATE

  This revenue ruling is applicable to the acquisitions that occur after January 30, 1981, the date of acquisition being the date on which the exchange of stock occurs within the meaning of section 1.368-1(d)(1)(iii) of the regulations.

Rev. Rul. 81-92, 1981-1 C.B. 133, 1981-12 I.R.B. 6.