Rev. Rul. 87-9

1987-1 C.B. 133, 1987-5 I.R.B. 4.

TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR

Published: February 2, 1987

SECTION 351. - TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR, 26 CFR 1.351-1: Transfer to corporation controlled by transferor

  Transfer to corporation controlled by transferor. The transfers of marketable stock by some transferors and cash by others to a newly organized corporation which is a regulated investment company constitute transfers to an 'investment company' within the meaning of section 351(a) of the Code. Consequently, section 351 does not apply and the transferors of the marketable stock recognize gain or loss under section 1001.

ISSUE

  Do transfers of marketable stock and cash by different transferors to a newly organized corporation, which is a regulated investment company, constitute transfers to an 'investment company' within the meaning of section 351(e)(1) of the Internal Revenue Code?

FACTS

  Some of the shareholders of Y corporation transferred their Y stock to X, a newly organized corporation which is a regulated investment company as defined in section 851 of the Code. In addition, other persons transferred cash to X. The Y stock is actively traded on a public stock exchange. The transferors of the Y stock received 89 percent of the stock of X, and the transferors of cash received 11 percent of the stock of X.

LAW AND ANALYSIS

  Section 351(a) of the Code provides that no gain or loss will be recognized if property is transferred to a corporation solely is exchange for its stock and immediately after the exchange the transferors are in control (as defined in section 368(c)) of the corporation.

  Section 351(e)(1) of the Code and section 1.351-1(c)(1) of the Income Tax Regulations provide that section 351(a) will not apply to transfers to an investment company. Section 1.351-1(c)(1) of the regulations further provides that a transfer will be considered a 'transfer to an investment company' if two factors are present. First, the transfer results, directly or indirectly, in diversification of the transferors' interests. Second, the transferee is (i) a regulated investment company, (ii) a real estate investment trust, or (iii) a corporation more than 80 percent of the value of whose assets (excluding cash and nonconvertible debt obligations from consideration) are held for investment and are readily marketable stocks or securities, or interests in regulated investment companies or real estate investment trusts.

  Section 1.351-1(c)(5) of the regulations provides that a transfer ordinarily results in the diversification of the transferors' interests if two or more persons transfer nonidentical assets to the corporation in the exchange, unless the portion of assets that are nonidentical to the other assets transferred constitutes an insignificant portion of the total value of the assets transferred. On the other hand, if two or more persons transfer identical assets to a newly organized corporation, the transfer will generally not be treated as resulting in diversification.

  In the present situation, the transferors transferred Y stock and cash to X, a regulated investment company within the meaning of section 1.351- 1(c)(1)(ii) of the regulations. Further, Y, stock and cash are nonidentical assets. A transfer of nonidentical assets ordinarily results in diversification unless the nonidentical assets constitute an insignificant portion of the assets transferred. The question of what is an 'insignificant portion' for this purpose is a factual issue. In the present situation, the cash represented a significant part of the value of the property transferred to X; therefore, the transfer of the stock and cash resulted in the diversification of the transferors' interests within the meaning of section 1.351-1(c)(5).

HOLDING

  The transfers of Y stock and cash by different transferors to X constitute transfers to an 'investment company' within the meaning of section 351(e)(1) of the Code. Consequently, section 351 does not apply to the transaction, and the transferors of the Y stock recognize gain or loss under section 1001 upon the transfer of Y stock to X in exchange for X stock.

Rev. Rul. 87-9, 1987-1 C.B. 133, 1987-5 I.R.B. 4