IRS Revenue Ruling
1998-27

Code Secs. 355, 7805

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26 CFR 1.355-2: Limitations.
(Also section 7805; 301.7805-1.)

Spin-off of subsidiary, followed by its merger with unrelated
corporation. Based on the enactment of section 1012 of the Taxpayer Relief
Act of 1997, the Service will not apply Court Holding (or any formulation
of the step transaction doctrine) to determine whether the distributed
corporation was a controlled corporation immediately before the
distribution under section 355(a) solely because of any postdistribution
acquisition or restructuring of the distributed corporation, whether
prearranged or not. Rev. Ruls. 96-30, 1996-1 C.B. 36, and 75-406, 1975-2
C.B. 125, obsoleted. Rev. Rul. 70-225, 1970-1 C.B. 80, modified.


REV. RUL. 98-27

PURPOSE

This revenue ruling obsoletes Rev. Ruls. 96-30, 1996-1 C.B. 36, and
75-406, 1975-2 C.B. 125, modified by Rev. Rul. 96-30. This revenue ruling
also modifies Rev. Rul. 70-225, 1970-1 C.B. 80.


BACKGROUND

Rev. Rul. 96-30 applies the principles of Commissioner v. Court Holding
Co., 324 U.S. 331 (1945), to a distribution of controlled corporation
stock by a publicly traded parent, followed by a merger of the controlled
corporation into an unrelated acquiring corporation. The former
shareholders of the controlled corporation receive a 25 percent interest
in the acquiring corporation. Based on all the facts and circumstances,
the ruling concludes that the transaction satisfies the requirements of
section 355 of the Internal Revenue Code. Rev. Rul. 96-30 also modifies
the factually similar Rev. Rul. 75-406 by eliminating the implication that
an independent, postdistribution shareholder vote to approve the
acquisition of a controlled corporation is, by itself, enough to prevent
application of the step transaction doctrine.

Section 1012(c) of the Taxpayer Relief Act of 1997 (the "Act"), Pub. L.
No. 105-34, 111 Stat. 788, 916-17, amended the control requirements of
sections 351 and 368(a)(1)(D) to provide that, generally for transactions
seeking qualification after August 5, 1997 under either provision and
section 355, the shareholders of the distributing corporation must own
stock possessing more than 50 percent of the voting power and more than 50
percent of the total value of the controlled corporation's stock
immediately after the distribution. Sections 351(c) and 368(a)(2)(H). In
addition, section 1012(a) of the Act amended section 355 by adding
subsection (e), which provides rules for the recognition of gain on
certain distributions of stock or securities of a controlled corporation
in connection with acquisitions of stock representing a 50 percent or
greater interest in the distributing corporation or any controlled
corporation. Section 1012(a) of the Act generally applies to distributions
after April 16, 1997, pursuant to a plan (or series of related
transactions) that involves an acquisition described in section
355(e)(2)(A)(ii) occurring after such date.

The Conference Report accompanying the legislation states, in part,
that:

The House bill does not change the present-law requirement under
section 355 that the distributing corporation must distribute 80 percent
of the voting power and 80 percent of each other class of stock of the
controlled corporation. It is expected that this requirement will be
applied by the Internal Revenue Service taking account of the provisions
of the proposal regarding plans that permit certain types of planned
restructuring of the distributing corporation following the distribution,
and to treat similar restructurings of the controlled corporation in a
similar manner. Thus, the 80-percent control requirement is expected to be
administered in a manner that would prevent the tax-free spin-off of a
less-than-80-percent controlled subsidiary, but would not generally impose
additional restrictions on post-distribution restructurings of the
controlled corporation if such restrictions would not apply to the
distributing corporation.


H.R. Rep. No. 105-220, at 529-30 (1997).


ANALYSIS

The application of Court Holding principles to determine whether the
distributed corporation was a controlled corporation immediately before
the distribution under section 355(a) imposes a restriction on
postdistribution acquisitions or restructurings of a controlled
corporation that is inconsistent with section 1012 of the Act. See section
1012(c) of the Act and H.R. Rep. No. 105-220, at 529-30. Accordingly, the
Service will not apply Court Holding (or any formulation of the step
transaction doctrine) to determine whether the distributed corporation was
a controlled corporation immediately before the distribution under section
355(a) solely because of any postdistribution acquisition or restructuring
of the distributed corporation, whether prearranged or not. In otherwise
applying the step transaction doctrine, the Service will continue to
consider all facts and circumstances. See, e.g., Rev. Rul. 63-260, 1963-2
C.B. 147. An independent shareholder vote is only one relevant factor to
be considered.


HOLDING

Based on the enactment of section 1012 of the Act, the Service will not
apply Court Holding (or any formulation of the step transaction doctrine)
to determine whether the distributed corporation was a controlled
corporation immediately before the distribution under section 355(a)
solely because of any postdistribution acquisition or restructuring of the
distributed corporation, whether prearranged or not.


EFFECT ON OTHER REVENUE RULINGS

Rev. Ruls. 96-30 and 75-406 are obsoleted. Rev. Rul. 70-225 is modified
to the extent inconsistent with this revenue ruling.


EFFECTIVE DATE

Pursuant to the authority of section 7805(b), this revenue ruling
applies to distributions after April 16, 1997. However, this revenue
ruling does not apply to a distribution pursuant to a plan (or series of
related transactions) that involves an acquisition described in section
355(e)(2)(A)(ii) if the acquisition is pursuant to an agreement that was
binding on April 16, 1997 and at all times thereafter, described in a
ruling request submitted to the Service on or before that date, or
described on or before that date in a public announcement or in a filing
with the Securities and Exchange Commission required solely by reason of
the acquisition or restructuring. The previous sentence shall not apply to
any agreement, ruling request, or public announcement or filing unless it
identifies the acquirer of the distributed corporation.


DRAFTING INFORMATION

The principal author of this revenue ruling is Phoebe Bennett of the
Office of Assistant Chief Counsel (Corporate). For further information
regarding this revenue ruling, contact Ms. Bennett at (202) 622-7750 or
Brendan P. O'Hara at (202) 622-7530 (not toll free calls).

<<END RULING>>

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