rr-15-09.pdf

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Section 368.—Definitions Relating to Corporate Reorganizations

26 CFR 1.368-2: Definition of terms.
(Also §§ 351, 7805; 1.351-1, 301.7805-1.)

Rev. Rul. 2015-09

ISSUE

Is a transaction in which (1) a domestic corporation transfers all of the stock of its
foreign operating subsidiary to its foreign holding company subsidiary in exchange for
additional stock, (2) the foreign operating subsidiary and three foreign subsidiaries of
the foreign holding company transfer substantially all of their assets to a newly-formed
foreign subsidiary of the foreign holding company in exchange for stock of the new
subsidiary, and (3) the subsidiaries that transfer their assets are liquidated, properly
treated for federal income tax purposes as a transfer of the foreign operating
subsidiary’s stock in an exchange governed by § 351 of the Internal Revenue Code
(Code) followed by reorganizations under § 368(a)(1)(D) of the Code?

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FACTS

P, a domestic corporation, owns all of the stock of S-1 and S-2, both of which are
incorporated in foreign country R. S-1 is an operating company. S-2 is a holding
company that owns all of the stock of X, Y, and Z, which are operating companies
incorporated in foreign country R.
All of the operating companies in country R are to be combined into a new subsidiary
of S-2 to be formed in country R in accordance with the following plan:
(a) S-2 will organize N corporation, in foreign country R, solely for the purpose of
participating in the proposed transaction.
(b) P will then transfer all of the stock of S-1 to S-2 in exchange for additional shares
of voting common stock of S-2 (P’s transfer).
(c) Immediately after P's transfer, X, Y, and Z, as well as S-1, will transfer
substantially all of their assets (subject to liabilities) to N, in exchange for
additional shares of common stock of N (X, Y, and Z’s transfers and S-1’s
transfer).
(d) X, Y, Z, and S-1 will liquidate and distribute all of their N stock to S-2 (X, Y, and
Z’s liquidations and S-1’s liquidation).
Following the transaction, N will continue to conduct the businesses formerly conducted
by S-1, X, Y, and Z.
To avoid recognizing gain under § 367(a)(1) and § 1.367(a)-3(a) on the transfer of
the S-1 stock to S-2, P will properly enter into a gain recognition agreement pursuant to
§ 1.367(a)-8 with respect to that transfer and will satisfy the applicable exceptions to
triggering events resulting from the other exchanges that occur in the transaction. P will

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also take into account the application of § 1.367(b)-4, which may require shareholders
that exchange stock of a foreign corporation in certain nonrecognition exchanges
(including §§ 351 and 354) to include in income as a deemed dividend the § 1248
amount attributable to the exchanged stock.

LAW

Section 351(a) provides that no gain or loss will be recognized if property is
transferred to a corporation by one or more persons solely in exchange for stock in such
corporation and immediately after the exchange such person or persons are in control
(as defined in § 368(c)) of the corporation.
Section 368(c) defines “control” to mean 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.
Section 368(a)(1)(D) provides that the term “reorganization” includes a transfer by a
corporation of all or a part of its assets to another corporation if immediately after the
transfer the transferor, or one or more of its shareholders (including persons who were
shareholders immediately before the transfer), or any combination thereof, is in control
of the corporation to which the assets are transferred; but only if, in pursuance of the
plan, stock or securities of the corporation to which the assets are transferred are
distributed in a transaction which qualifies under § 354, 355, or 356.
Section 354(a) provides, in general, that no gain or loss will be recognized if stock or
securities in a corporation a party to a reorganization are, in pursuance of the plan of

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reorganization, exchanged solely for stock or securities in such corporation or in another
corporation a party to the reorganization.
Section 368(b)(2) provides that “a party to a reorganization” includes both
corporations, in the case of a reorganization resulting from the acquisition by one
corporation of stock or property of the other.
Section 354(b)(1) provides, in general, that § 354(a) will not apply to an exchange in
pursuance of a plan of reorganization under § 368(a)(1)(D) unless (A) the corporation to
which the assets are transferred acquires substantially all of the assets of the transferor
of such assets; and (B) the stock, securities, and other properties received by such
transferor, as well as the other properties of such transferor, are distributed in
pursuance of the plan of reorganization.
Section 368(a)(2)(H) provides that for purposes of determining whether a nondivisive
transaction qualifies under § 368(a)(1)(D), the term “control” has the meaning given
such term by § 304(c).
Section 304(c)(1) provides that “control” means the ownership of stock possessing at
least 50 percent of the total combined voting power of all classes of stock entitled to
vote, or at least 50 percent of the total value of shares of all classes of stock. If a
person (or persons) is in control (within the meaning of the preceding sentence) of a
corporation, which in turn owns at least 50 percent of the total combined voting power of
all stock entitled to vote of another corporation or owns at least 50 percent of the total
value of the shares of all classes of stock of another corporation, then such person (or
persons) will be treated as in control of such other corporation.

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ANALYSIS
A transfer of property may be respected as a § 351 exchange even if it is followed by
subsequent transfers of the property as part of a prearranged, integrated plan. See
Rev. Rul. 77-449, 1977-2 C.B. 110, amplified by Rev. Rul. 83-34, 1983-1 C.B. 79, and
Rev. Rul. 83-156, 1983-2 C.B. 66; see also Rev. Rul. 2003-51, 2003-1 C.B. 938.
However, a transfer of property in an exchange otherwise described in § 351 will not
qualify as a § 351 exchange if, for example, a different treatment is warranted to reflect
the substance of the transaction as a whole. See Rev. Rul. 54-96, 1954-1 C.B. 111;
Rev. Rul. 70-140, 1970-1 C.B. 73; see also Rev. Rul. 2015-10, this Bulletin (holding that
the transfer by a corporation to its wholly-owned subsidiary of all of the interests in an
entity classified as a corporation for federal income tax purposes, followed by the
entity’s planned election to be disregarded as separate from its owner for federal
income tax purposes, is more properly characterized as a § 368(a)(1)(D) reorganization
than as a § 351 transfer followed by a § 332 liquidation).
Under the facts of this revenue ruling, P’s transfer satisfies the formal requirements of
§ 351, including the requirement that P control S-2 within the meaning of § 368(c)
immediately after the exchange. Moreover, even though P’s transfer and S-1’s transfer
and liquidation are steps in a prearranged, integrated plan that has as its objective the
consolidation of S-1 and the other operating companies in N, an analysis of the
transaction as a whole does not dictate that P’s transfer be treated other than in
accordance with its form in order to reflect the substance of the transaction.
Accordingly, P’s transfer is respected as a § 351 exchange, and no gain or loss is
recognized by P on the transfer of all of the stock of S-1 to S-2.

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S-1’s transfer followed by S-1’s liquidation is a reorganization under § 368(a)(1)(D).
X, Y, and Z’s transfers followed by X, Y, and Z’s liquidations are also reorganizations
under § 368(a)(1)(D).
HOLDING
A transaction in which (1) a domestic corporation transfers all of the stock of its
foreign operating subsidiary to its foreign holding company subsidiary in exchange for
additional stock, (2) the foreign operating subsidiary and three foreign subsidiaries of
the foreign holding company transfer substantially all of their assets to a newly-formed
foreign subsidiary of the foreign holding company in exchange for stock of the new
subsidiary, and (3) the subsidiaries that transfer their assets are liquidated, is properly
treated for federal income tax purposes as a transfer of the foreign operating
subsidiary’s stock in an exchange governed by § 351 followed by reorganizations under
§ 368(a)(1)(D).
EFFECT ON OTHER REVENUE RULING
Rev. Rul. 78-130, 1978-1 C.B. 114 is revoked.
PROSPECTIVE APPLICATION
Under the authority of § 7805(b)(8), the Internal Revenue Service will not apply this
revenue ruling to challenge a position taken by a taxpayer that reasonably relied on the
conclusions in Rev. Rul. 78-130 prior to May 5, 2015 with respect to a transaction that
occurs on or before such date, or a transaction that is effected pursuant to a written
agreement (subject to customary conditions) that is binding on May 5, 2015 and at all
times thereafter until the date the transaction is completed, provided that none of the
purported acquiring corporation, issuing corporation, and transferor corporation (and

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each of their shareholders) treated the transaction inconsistently for federal income tax
purposes. See § 601.601(d)(2)(v)(c) of the Statement of Procedural Rules.
DRAFTING INFORMATION
The principal author of this revenue ruling is Stephanie D. Floyd of the Office of
Associate Chief Counsel (Corporate). For further information regarding this revenue
ruling, contact Stephanie D. Floyd at (202) 317-6848 (not a toll-free call).