REVENUE RULE 95-69

1995-2 C.B. 38, 1995-42 I.R.B. 4

CONTINUITY OF INTEREST; DISTRIBUTION BY A PARTNERSHIP OF STOCK RECEIVED IN A REORGANIZATION

Released: September 29, 1995
Published: October 16, 1995

Section 368.--Definitions Relating to Corporate Reorganizations, 26 CFR 1.368- 1: Purpose and scope of exception of reorganization exchanges.

Continuity of interest; distribution by a partnership of stock received in a reorganization. Satisfaction of the continuity of proprietary interest requirement of section 1.368-1(b) of the regulations is not affected by a partnership's distribution of stock received in a reorganization to its partners in accordance with their interests in the partnership.

ISSUE

Is satisfaction of the continuity of proprietary interest requirement of s 1.368-1(b) of the Income Tax Regulations affected by a partnership's distribution of stock received in a reorganization to its partners in accordance with their interests in the partnership?

FACTS

PRS, a limited partnership, holds all of the 100 outstanding shares of stock of X corporation. GP and LP, the partners of PRS, are United States individuals. PRS holds other assets in addition to the stock of X.

All of the outstanding stock of Y corporation is held by A, a United States individual. For valid business reasons, X will merge into Y and, after the merger, Y will elect to be treated as an S corporation. X, Y, PRS, GP, and LP execute a binding written agreement and plan of reorganization pursuant to which they effect the following transaction:

(1) On December 30 of Year 1, X merges into Y pursuant to state law. In the merger, PRS receives 100 shares of Y stock in exchange for its 100 shares of X stock. GP and LP are not in control of Y within the meaning of s 304(c) of the Internal Revenue Code.

(2) Immediately thereafter, PRS makes a non-liquidating distribution of the Y stock received in the merger in order that Y can qualify as a small business corporation eligible to elect to be an S corporation. The Y stock is distributed to GP and LP in accordance with their interests in PRS.

(3) Y elects to be treated as an S corporation, and the Y shareholders consent to such election.

LAW AND ANALYSIS

Section 368(a)(1) defines the term "reorganization." Section 1.368-1(b) provides that requisite to a reorganization under the Code is a continuity of interest in the business enterprise under modified corporate form on the part of those persons who, directly or indirectly, were the owners of the enterprise prior to the reorganization. This section further explains that the purpose of this requirement is to ensure that the exceptions to the general rule of taxability are limited to readjustments of corporate structures that are required by business exigencies and that effect only a readjustment of continuing interest in property under modified corporate forms.

Prior to the merger, GP and LP, through their interests in PRS, owned the X business enterprise indirectly within the meaning of s 1.368-1(b). After the merger and before the distribution, GP and LP remained indirect owners of the X business enterprise through the Y stock held by PRS. PRS's distribution of the Y stock to GP and LP in accordance with their interest in PRS does not result in a change in GP's and LP's underlying ownership of the X business enterprise. Accordingly, the distribution does not affect whether the continuity of proprietary interest requirement of s 1.368-1(b) is satisfied. Cf. Rev. Rul. 84-30, 1984-1 C.B. 114.

HOLDING

Satisfaction of the continuity of proprietary interest requirement of s 1.368-1(b) is not affected by a partnership's distribution of stock received in a reorganization to its partners in accordance with their interests in the partnership.

DRAFTING INFORMATION

The principal author of this revenue ruling is Theresa Abell of the Office of Assistant Chief Counsel (Corporate). For further information regarding this revenue ruling contact Ms. Abell on (202) 622-7790 (not a toll-free call).

Rev. Rul. 95-69, 1995-2 C.B. 38, 1995-42 I.R.B. 4