Rev. Rul. 86-52

1986-1 C.B. 204, 1986-15 I.R.B. 42.

CARRYOVER; REORGANIZATION; MERGER; CONTROLLED CORPORATIONS

Published: April 14, 1986

Section 382.-Special Limitations on Net Operating Loss Carryover 26 CFR

1.382(b)-1: Change of ownership as the result of a reorganization.

  Carryover; reorganization; merger; controlled corporations. A loss corporation X formed a wholly owned subsidiary P which formed a wholly owned subsidiary S. S then merged into X in a reorganization under sections

368(a)(1)(A) and 368(a)(2)(E) of the Code, with the former X shareholders owning P stock with a fair market value exceeding 20 percent of the fair market value of the outstanding X stock. X's net operating loss carryover is not reduced under section 382(b) before amendment by section 806(e) of the Tax Reform Act of 1976.

ISSUE

  Is the net operating loss carryover of the acquiring corporation reduced under section 382(b) of the Internal Revenue Code, before amendment by section

806(e) of the Tax Reform Act of 1976, 1976-3 (Vol. 1) C.B. 1, 75 (the Act), in the reverse triangular organization described below?

FACTS

  X, a corporation engaged in an ongoing business, had common stock that was publicly traded. X had net operating loss carryovers. In order to form a holding company structure, X caused P corporation to be organized. Shortly thereafter, P organized a wholly owned subsidiary, S, which in 1977 merged into X in a transaction qualifying as a reorganization described in sections

368(a)(1)(A) and 368(a)(2)(E) of the Code. X acquired all of the assets of S. As a newly formed corporation, S had no liabilities to be assumed by X. Thereafter, the separate corporation existence of S ceased and X survived the merger. Except for dissenters to the merger, each share of the outstanding stock of X was converted into three shares of P common stock, and X's outstanding stock certificates thereafter represented shares of P common stock. The shares of S stock outstanding immediately prior to the merger were cancelled in the merger. For each share of S stock held by P prior to the merger, 10 shares of new X common stock were issued to P in the merger. As a result of the reorganization, the former X shareholders owned all the outstanding P stock and P owned all the outstanding X stock. The fair market value of the P stock, immediately after the reorganization, was equal to the then fair market value of the X stock.

LAW AND ANALYSIS

  Section 382(b)(1) of the Code, before amendment by the Act (old section 382), provided in part that if, in the case of a reorganization described in section

368(a)(1)(A), the transferor corporation or acquiring corporation has a net operating loss which is a net operating loss carryover to the first taxable year of the acquiring corporation ending after the date of the transfer, and the stockholders (immediately before the reorganization) of such corporation

(loss corporation), as the result of owning stock of the loss corporation, own

(immediately after the reorganization), less than 20 percent of the fair market value of the outstanding stock of the acquiring corporation, the total net operating loss carryover shall be reduced.

  Old section 382(b)(6) of the Code provides in part that if the stockholders of the loss corporation (immediately before the reorganization) own, as a result of the reorganization, stock in a corporation controlling the acquiring corporation, such stock of the controlling corporation shall, for purposes of old section 382(b), be treated as stock of the acquiring corporation in an amount valued at an equivalent fair market value. X is the loss corporation and also, because it acquired S, the acquiring corporation.

  Under old section 382(b)(1) of the Code, if the former stockholders of X, as a result of owning stock of X, own (immediately after the reorganization), less than 20 percent of the fair market value of the outstanding stock of X, the acquiring corporation, X's net operating loss carryover would be reduced. The stockholders of X own none of the outstanding stock of X after the reorganization, because the former shareholders of X, as a result of the reorganization, own stock in P. However, because P controls X, the acquiring corporation, the former X shareholders will be treated under old section

382(b)(6) as owning, after the reorganization, stock of X in an amount equivalent to the fair market value of the stock of P that they hold.

HOLDING

  Because of the fair market value of the P stock the former X shareholders own as a result of the reorganization exceeds 20 percent of the fair market value of the outstanding X stock, X's net operating loss carryover is not reduced by old section 382(b)(1) of the Code.

Rev. Rul. 86-52, 1986-1 C.B. 204, 1986-15 I.R.B. 42.