Rev. Rul. 84-29

1984-1 C.B. 181, 1984-8 I.R.B. 13.

                       Internal Revenue Service
                                 Revenue Ruling

    INVOLUNTARY CONVERSIONS;  SALE TO EFFECTUATE POLICIES OF F.C.C.;  ASSETS
                     PURCHASED TRANSFERED TO NEW SUBSIDIARY

                          Published: February 21, 1984

SECTION 1033. - -INVOLUNTARY CONVERSIONS, 26 CFR 1.1033(a)-1: Involuntary conversions, nonrecognition of gain

(Also Sections 351, 1071; 1.351-1, 1.1071-1.)

  Involuntary conversions;  sale to effectuate policies of F.C.C.;  assets purchased transferred to new subsidiary.  The transfer, under section 351 of the Code, of assets previously purchased in accordance with sections 1033 and 1071, to a taxpayer's newly organized subsidiary will not disqualify the assets as eligible replacement property.

ISSUE

  Does the transfer of assets under section 351 of the Internal Revenue Code, previously purchased by the taxpayer in accordance with the involuntary conversion provisions of sections 1033 and 1071, to its newly organized subsidiary disqualify the assets as eligible replacement property?

FACTS

  The taxpayer, a domestic corporation, is principally engaged in the broadcasting business.  In 1978, the taxpayer sold the assets of television station TVI.  The sale was certified by the Federal Communications Commission (FCC) to be necessary or appropriate to effectuate compliance with FCC rules. The taxpayer elected to treat the sale as an involuntary conversion under sections 1071 and 1033 of the Code, and within the applicable replacement period purchased the assets of television station TV2.  The assets of TV2 qualified as eligible replacement property under section 1033.  The purchase price of TV2 exceeded the proceeds from the sale of TV1.

  The taxpayer transferred all the assets of TV2 to a new domestic subsidiary in a transaction which qualifies under section 351 of the Code.  In exchange for the assets, the taxpayer received all of the stock of the subsidiary.  The subsidiary assumed the liabilities of TV2.  The transfer was done to facilitate the orderly management of the taxpayer's business.  The taxpayer has no intention of disposing of any of the stock of the subsidiary, and the subsidiary has no intention of disposing of any of the assets of TV2 other than in the ordinary course of business.

LAW AND ANALYSIS

  Section 1071(a) of the Code provides that if a sale or exchange of property  (including stock in a corporation) is certified by the FCC to be necessary or appropriate to effectuate a change in a policy of, or the adoption of a new policy by, the FCC with respect to the ownership and control of radio broadcasting stations, such sale or exchange shall, if the taxpayer so elects, be treated as an involuntary conversion of such property within the meaning of section 1033 of the Code.

  Section 1.1071-1(d) of the Income Tax Regulations provides that, for purposes of section 1071, the term "radio broadcasting" includes telecasting.

  Section 1033 of the Code governs the federal income tax treatment of involuntary conversions.  The general rule permits nonrecognition of any gain realized if property is compulsorily or involuntarily converted into property similar or related in service or use to the converted property.  If property is converted into money or dissimilar property, then gain is recognized only to the extent the amount realized upon the conversion exceeds the cost of property similar in service or use which is purchased as a replacement.

  In Rev. Rul. 77-422, 1977-2 C.B. 307, the Service clarified its position with respect to John Richard Corp. v. Commissioner, 46 T.C. 41 (1966), nonacq., 1974-2 C.B. 5, withdrawing acq., 1967-2 C.B. 3, which held that a taxpayer was entitled to nonrecognition or gain on involuntarily converted property that was replaced by purchasing control of a newly formed corporation that subsequently purchased property similar in service or use to the converted property.  This revenue ruling holds that the Service will not follow the decision in John Richard Corp.  In order for the nonrecognition provisions of section 1033 of the Code to apply to a situation similar to that in John Richard Corp., the acquired corporation must own the replacement property when control of the corporation is acquired.

  In the instant situation the taxpayer transferred all of the assets of TV2 to its new domestic subsidiary in exchange for all of its stock.  The assets were transferred to its new domestic subsidiary merely to facilitate the orderly management of the

taxpayer's business.  Unlike the situation described in Rev. Rul. 77-422, the taxpayer in the present case maintained control of the TV2 assets both before and after the transfer of the assets of the new subsidiary. Neither the purpose of the original transaction nor the tax result under sections 1033 and 1071 of the Code have been affected in any way.

HOLDING

  The transfer of the assets to the taxpayer's newly-organized subsidiary, as described above, will not disqualify the assets of TV2 as eligible replacement property under sections 1033 and 1071 of the Code.

Rev. Rul. 84-29, 1984-1 C.B. 181, 1984-8 I.R.B. 13.