Rev. Rul. 89-57
1989-1 C.B. 90, 1989-17 I.R.B. 4.
Internal Revenue Service
Revenue Ruling
REDEMPTION; RELATED CORPORATION; CONTROL, VALUE TEST IN THE AGGREGATE
Published: April 24, 1989
Section 304. - Redemption Through Use of Related Corporations, 26 CFR 1.304-2: Acquisition by related corporation (other than subsidiary).
Redemption; related corporation; control, value test in the aggregate. In determining whether the control requirement of section 304(a)(1)(A) of the Code is met the value test of section 304(c)(1) is not applied class-by-class but, instead, is applied to the aggregate of all classes of a corporation's stock.
ISSUE
If a person owns 50 percent or more of the aggregate value of all the stock of a corporation but owns less than 50 percent of one of the classes of the corporation's stock, is the person in control of the corporation for purposes of section 304(c)(1) of the Internal Revenue Code?
FACTS
I owned all the outstanding stock of corporation Y.
I and C, a person not related to I, together owned all the outstanding stock of corporation X. I owned the X Class B stock (44 shares) and C owned the X Class A stock (45 shares). The fair market value of the 44 shares of X Class B stock held by I was 30x dollars, and the fair market value of the 45 shares of X Class A stock held by C was 20x dollars. Thus, I owned 60 percent (30/50) of the aggregate fair market value of the X stock outstanding. The Class A stock and the Class B stock each had one vote per share. Thus, I held less than 50 percent of the vote in X (44/89). The difference in value between the Class A stock and the Class B stock was due to differences in dividend and liquidation rights.
Y purchased I's X stock for 30x dollars cash, the stock's fair market value.
LAW AND ANALYSIS
Section 304(a)(1) of the Code deals with acquisitions of stock between commonly controlled corporations other than those in a parent-subsidiary relationship. Section 304(a)(1) provides that, for purposes of section 302, if a person is in control of each of two corporations and, in return for property, one of the corporations (the acquiring corporation) acquires stock in the other corporation (the issuing corporation) from that person, then the property is treated as a distribution in redemption of the stock of the acquiring corporation.
Section 304(c)(1) of the Code provides that control, for purposes of section 304, means the ownership of stock possessing either at least 50 percent of the total combined voting power of all classes of stock entitled to vote (the voting power test), or at least 50 percent of the total value of shares of all classes of stock (the value test).
Under section 317(a) of the Code, money is property for purposes of section 304(a)(1). Because I received money from Y in exchange for stock in X, I's receipt of the money is subject to the provisions of section 304(a)(1) if I was in control of both X and Y within the meaning of section 304(c)(1).
I was in control of Y because I owned all of the outstanding Y stock immediately before the transaction.
Because I owned stock in Y possessing only 44 votes out of a total of 89 votes, I did not satisfy the voting power test of section 304(c)(1) of the Code. If the value test of section 304(c)(1) is determined in an aggregate manner, then I was in control of X because I owned 60 percent of the total value of the X stock outstanding. If, however, the value test is determined in a class-by-class manner, then I was not in control of X because I did not own any of the X Class A stock.
The fact that the statute bases the value test of section 304(c)(1) of the Code on the total value of shares implies that the test is applied in an aggregate manner rather than in a class-by-class manner. See Rev. Rul. 87-88, 1987-2 C.B. 81 (concluding that if a corporation has more than one class of common stock outstanding, the provisions of section 302(b)(2)(C) are applied in an aggregate manner and not in a class-by-class manner). Moreover, construing the value test as involving a class-by-class approach would render that test meaningless. Under such a construction, the value test could be satisfied only when the voting power test is also satisfied. Thus, control would exist if, and only if, the voting power test is met. Therefore, for purposes of section 304(c)(1), the determination of the total value of the X stock must be made by aggregating all of the outstanding classes of X stock.
HOLDING
Because I owned X Class B stock having a value of at least 50 percent of the total value of all of the outstanding X stock, I is in control of X for purposes of section 304(c)(1) of the Code, even though I owned none of the X Class A stock.
Under section 304(a) and (b) of the Code, the 30x dollars I received from Y is treated as a distribution in redemption of stock in Y, and this redemption is tested under section 302(b) by reference to the stock of X. Under sections 304(b)(1) and 318(a)(2)(C), I's equity interest in X is not decreased and, therefore, paragraphs (1), (2), and (3) of section 302(b) do not apply. Accordingly, this deemed redemption is described in section 302(d), and not section 302(a).
DRAFTING INFORMATION
The principal author of this revenue ruling is Michael Danbury of the Office of Chief Counsel (Corporate). For further information regarding this revenue ruling contact Mr. Danbury on (202) 566-3544 (not a toll-free call).
Rev. Rul. 89-57, 1989-1 C.B. 90, 1989-17 I.R.B. 4.