REVENUE RULE 93-61

1993-2 C.B. 118, 1993-30 I.R.B. 10.

Internal Revenue Service
Revenue Ruling

CORPORATE REORGANIZATIONS; STOCK EXCHANGED FOR NOTE AND STOCK; DIVIDEND EQUIVALENCY

Published: September 9, 1993

§ 356. Receipt of Additional Consideration, 26 CFR 1.356-1: Receipt of additional consideration in connection with an exchange

(See Also § 7805; 301.7805-1.)

Corporate reorganizations; stock exchanged for note and stock; dividend equivalency. Rev. Rul. 75-83 is revoked as a result of the Supreme Court's decision in Commissioner v. Clark which determined whether the receipt of boot in an acquisitive reorganization has the effect of a dividend distribution under § 356(a)(2) of the Code.

This revenue ruling revokes Rev. Rul. 75-83, 1975-1 C.B. 112.

LAW AND ANALYSIS

§ 354(a) of the Internal Revenue Code provides that no gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. If § 354 would apply to the exchange except for the receipt of money or property other than stock or securities in a corporate party to the reorganization, referred to as boot, § 356(a)(1) provides that the recipient shall recognize gain, but in an amount not in excess of the sum of the money and the fair market value of the other property. Under § 356(a)(2), if an exchange described in § 356(a)(1) has the effect of the distribution of a dividend, the shareholder must treat the gain recognized on the exchange as a dividend to the extent of the distributee's ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913.

In Rev. Rul. 75-83, X corporation merged into Y corporation in a reorganization under § 368(a)(1)(A) of the Code. The sole shareholder of X corporation received shares of Y corporation stock and a note, which was treated as boot under § 356(a)(1). To determine whether the exchange had the effect of the distribution of a dividend under § 356(a)(2), the Service treated the distribution as though it were made by the acquired corporation (X) and not the acquiring corporation (Y). Therefore, the Service concluded that the exchange had the effect of a dividend under § 356(a)(2).

In Commissioner v. Clark, 489 U.S. 726 (1989), 1989-2 C.B. 68, the sole shareholder of a target corporation exchanged his target stock for stock of an acquiring corporation and cash. The Supreme Court applied the dividend equivalency rules for redemptions contained in § 302 of the Code to determine whether the boot payment had the effect of a dividend distribution under § 356(a)(2). At issue was whether the boot payment should be treated as if it were made (i) by the target corporation in a hypothetical § 302 redemption of a portion of the shareholder's target stock prior to and separate from the reorganization exchange, or (ii) by the acquiring corporation in a hypothetical § 302 redemption of the acquiring stock that the shareholder would have received in the reorganization exchange if there had been no boot distribution. The Court concluded that the treatment of a boot distribution is determined "by examining the effect of the exchange as a whole," 489 U.S. 726, 737, and held that the second approach better tested the effect of the payment of boot as a component in the overall exchange.

HOLDING

In an acquisitive reorganization, the determination of whether boot is treated as a dividend distribution under § 356(a)(2) of the Code is made by comparing the interest the shareholder actually received in the acquiring corporation in the reorganization exchange with the interest the shareholder would have received in the acquiring corporation if solely stock had been received.

EFFECT ON OTHER RULINGS

Rev. Rul. 75-83 is revoked.

PROSPECTIVE APPLICATION

Pursuant to the authority contained in § 7805(b) of the Code, the Service will not challenge a shareholder's tax treatment of boot received in an acquisitive reorganization if such treatment is consistent with either Clark or with Rev. Rul. 75-83, provided that the boot was received in an acquisitive reorganization consummated on or before March 22, 1989 (the date of the Supreme Court's decision in Clark) or consummated after that date pursuant to terms of a plan of reorganization adopted on or before that date.

DRAFTING INFORMATION

The principal author of this ruling is Diana C. MacKeen of the Office of Assistant Chief Counsel (Corporate). For further information regarding this revenue ruling contact Ms. MacKeen at (202) 622-7550 (not a toll-free call).

Rev. Rul. 93-61, 1993-2 C.B. 118, 1993-30 I.R.B. 10.