Rev. Rul. 89-46

1989-1 C.B. 272, 1989-14 I.R.B. 16.

                       Internal Revenue Service

                                 Revenue Ruling

                            Published: April 3, 1989

26 CFR 1.1502-34: Special aggregate stock ownership rates.

(Also Section 332, 351, 7805; 1.332-2, 1.351-1, 301.7805-1.)

  Consolidated returns; affiliated group; aggregate stock ownership rules. The aggregate stock ownership rules of section 1.1502-34 of the regulations apply regardless of actual stock ownership by a member of an affiliated group. Rev. Rul. 74-598 modified.

  The common parent and its two wholly owned subsidiaries are members of an affiliated group of corporations that files a consolidated Federal income tax return. One subsidiary corporation transferred certain property to the other subsidiary in exchange for a security of the receiving corporation equal in value to the fair market value of the property transferred. The transferring corporation realized either gain or loss on the transaction because the basis of the transferred property in its hands did not equal its fair market value.

  ISSUE. At issue is whether the aggregate stock ownership rules of regulation section 1.1502-34 attribute stock of another corporation owned by one member of the affiliated group to other members not actually owning any stock in the corporation.

  HOLDING. The Service ruled that, if a member of an affiliated group that files a consolidated return owns stock of another corporation, the aggregate stock ownership rules of regulation section 1.1502-34 attribute that stock to other members of the group, regardless of whether the other members actually own any stock in the corporation. Thus, the Service found that the transferring subsidiary did not recognize either gain or loss on this transaction because, for purposes of section 351(a), its parent's ownership of the receiving corporation's stock was attributed to it.

  ANALYSIS. The Service concluded that the holding of Rev. Rul. 74-598 is incorrect in its conclusion that regulation section 1.1502-34 applies to attributed stock owned by members of an affiliated group to other members of the group only if the other members actually own some of the stock. Such an interpretation is not required by the plain language of section 1.1502-34 and would not further the purpose of that section, the Service stated.

  Accordingly, the Service concluded that, in the present situation, the requirements of Code section 351 are satisfied, even though the transferring corporation has no actual stock ownership in its affiliated corporation which received the property. For purposes of the section 351(a), the transferring corporation is considered the owner of the shares of the receiving corporation which are held by its parent corporation. However, if the transferring corporation was not a member of an affiliated group filing a consolidated income tax return, section 351(a) would not prevent the recognition of gain or loss on the transfer of property from one subsidiary to a related subsidiary, the Service noted.

  Notwithstanding this modification of Rev. Rul. 74-598, the Service found that Rev. Rul. 74-598 is correct in its ultimate conclusion that section 332 does not prevent recognition of gain on the transaction described therein. In Rev. Rul. 74-598, one member of an affiliated group filing a consolidated return was to transfer all of its assets to another member of the group that did not own any stock of the transferring corporation. Although regulation section 1.1502- 34 applies to satisfy the 80-percent ownership requirement of section 332(b)(1), it does not apply to satisfy the requirement of section 332(b)(2) or (3) that the distribution be in complete cancellation or redemption of the liquidating corporation's stock, the Service stated. Since the corporation receiving the assets actually owned no stock in the transferring corporation, none of the received property was received in a liquidating or redeeming distribution, the Service explained.

  EFFECT ON OTHER REVENUE RULINGS. The Service declared that Rev. Rul. 74-598, 1974-2 C.B. 287, amplified by Rev. Rul. 75-383, 1975-2 C.B. 127, is modified to hold that the attribution rules of regulation section 1.1502-34 apply for the purpose of determining whether a member satisfies the 80-percent ownership requirement of Code section 332(b)(1), regardless of whether the member actually owns stock in the 'issuing corporation.' Section 1.1502-34 does not apply, the Service pointed out, for purposes of determining whether the other requirements of section 332 are met.

  PROSPECTIVE APPLICATION. Any taxpayer that desires to treat a transaction in accordance with the position of Rev. Rul. 74-598 prior to its modification by this revenue rule may request retroactive relief from the holding of this ruling pursuant to Code section 7805(b) for transactions entered into prior to April 3, 1989.

ISSUE

  If a member of an affiliated group that files a consolidated income tax return owns stock of another corporation, do the aggregate stock ownership rules of section 1.1502-34 of the Income Tax Regulations attribute that stock to other members that do not actually own any stock in the corporation?

FACTS

  P is the common parent of an affiliated group of corporations that files a consolidated federal income tax return. P has two wholly owned subsidiaries, X and Y, that are members of the P group. On June 1, 1988, X transferred certain property to Y in exchange for a security of Y. The face amount and fair market value of the security equaled the fair market of the property transferred, but the basis of the property in the hands of X did not equal its fair market value.

LAW AND ANALYSIS

  Section 1.1502-34 of the regulations provides that, for purposes of sections 1.1502-1 through 1.1502-80, in determining the stock ownership of a member of the group in another corporation (the 'issuing corporation') for purposes of determining the application of section 332(b)(1) or 351(a) (among other sections) in a consolidated return year, there shall be included stock owned by all other members of the group in the issuing corporation. Paragraphs (2) and (3) of section 332(b) are not among the sections whose application is determined according to this special attribution rule.

  Section 332(a) of the Internal Revenue Code provides that no gain or loss shall be recognized on the receipt by a corporation of property distributed in complete liquidation of another corporation. Section 332(b)(1) provides that section 332(a) applies only if the corporate distributee satisfies an 80- percent ownership requirement with respect to the liquidating corporation. Further, under section 332(b)(2) and (3), section 332(a) applies only if the liquidating distribution is in complete cancellation or redemption of all the liquidating corporation's stock.

  Section 351(a) of the Code provides that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in the corporation and immediately after the exchange the person or persons are in control (as defined in section 368(c)) of the corporation.

  Section 368(c) of the Code generally provides that the term 'control' means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation.

  Rev. Rul. 74-598, 1974-2 C.B. 287, amplified by Rev. Rul. 75-383, 1975-2 C.B. 127, concerns an affiliated group filing a consolidated income tax return in which a wholly owned foreign subsidiary (S-1) of one member of the group (P) was to transfer all of its assets to another member of the group (S-2) that did not own any stock of the foreign corporation. The ruling holds that section 1.1502-34 of the regulations applies to attribute stock owned by members of an affiliated group to other members of the group only if the other members actually own some of the stock. The ruling concludes that because S-2 did not actually own any stock of S-1, section 1.1502-34 does not attribute stock ownership to S-2, and thus section 332 of the Code does not prevent recognition of gain on the transfer. This holding is incorrect. Such an interpretation is not required by the plain language of section 1.1502-34 and would not further the purpose of that section.

  Rev. Rul. 74-598 is correct, however, in its ultimate conclusion that section 332 of the Code does not apply to S-2's receipt of property from S-1 as described in that ruling. Although section 1.1502-34 of the regulations applies to satisfy the 80-percent ownership requirement of section 332(b)(1), it does not apply to satisfy the requirement of section 332(b)(2) or (3)  that the distribution be in complete cancellation or redemption of the liquidating corporation's stock. Since S-2 actually owned no stock in S-1, none of the property received by S-2 from S-1 was received in such a distribution. However, the transaction described in Rev. Rul. 74-598 still may qualify as a reorganization under section 368(a)(1)(D). See Rev. Rul. 75-383.

  In the present situation, X, a member of the P group, transferred property to Y, the 'issuing corporation,' solely in exchange for a security of Y. Thus, the requirements of section 351(a) of the Code, other than the control requirement, are satisfied by the exchange. Under section 1.1502-34 of the regulations, even though X has no actual stock ownership in Y, X is considered, for purposes of section 351(a), the owner of the Y shares owned by P. Because P owns 100 percent of the stock of Y, X is in control of Y immediately after the exchange. Therefore, section 351(a) applies to the exchange, and X recognizes no gain or loss on the exchange. See Rev. Rul. 73-473, 1973-2 C.B. 115. Cf. Rev. Rul. 73- 472, 1973-2 C.B. 114. If X were not a member of an affiliated group filing a consolidated income tax return, section 351(a) would not prevent recognition of gain or loss on the transfer of property from X to Y because X did not own at least 80 percent of the Y stock and thus would not be in control of Y immediately after the transaction.

HOLDING

  If a member of an affiliated group that files a consolidated income tax return owns stock of another corporation, the aggregate stock ownership rules of section 1.1502-34 of the regulations attribute that stock to other members of the group, regardless of whether the other members actually own any stock in the corporation.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 74-598 is modified to hold that the attribution rules of section 1.1502-34 of the regulations apply for the purpose of determining whether a member satisfies the 80-percent ownership requirement of section 332(b)(1) of the Code, regardless of whether the member actually owns stock in the 'issuing corporation.' Section 1.1502-34 does not apply, however, for purposes of determining whether the other requirements of section 332 are met.

PROSPECTIVE APPLICATION

  Any taxpayer that (1) desires to treat a transaction in accordance with the position in Rev. Rul. 74-598 that section 1.1502-34 of the regulations does not apply absent actual ownership of stock in a corporation and (2) entered into such transaction prior to April 3, 1989, the date of publication of this revenue ruling in the Internal Revenue Bulletin, or pursuant to a binding contract that was in effect on such date and at all times thereafter until the consummation of such transaction, may request retroactive relief from the holding of this ruling pursuant to section 7805(b) of the Code.

DRAFTING INFORMATION

  The principal author of this revenue ruling is Kenneth E. Cohen of the Office of the Assistant Chief Counsel (Corporate). For further information regarding this revenue ruling contact Mr. Cohen on (202) 566-3877 (not a toll-free call).

Rev. Rul. 89-46, 1989-1 C.B. 272, 1989-14 I.R.B. 16.