Tax-free reorganization for great-grandparent stock.

• Author: Bloom, Gilbert D.

It seems axiomatic that the acquiring corporation in a reorganization cannot use its grandparent's stock. Of course this same rule applies to its great-grandparent's stock. Yet the IRS over the past few years has punctured so many holes in this precept that taxpayers now do not hesitate to use the stock of a remote upper tier corporation as the consideration in a tax-free reorganization.

Background

For the following discussion assume that corporation A owns all of the stock of corporation B, B owns all of the stock of corporation C and C owns of the stock of corporation D. Target is an unrelated corporation whose assets will be acquired by the ABCD group. Rev. Rul. 64-73 is the starting point in this analysis. However, that ruling only stands for the proposition that when some of Target's assets are acquired by A and some by C, in exchange for A's stock, the transaction might legitimately be viewed as if A acquired all of Target's assets in a "C" reorganization and then A transferred some of those assets to B, which in turn transferred them to C in a "double drop-down" under Sec. 368(a)(2)(C). Since A stock was used and A actually acquired some of Target's assets, it is hard to conclude that Rev. Rul. 64-73 was a grandparent stock ruling.

Also to be considered is Rev. Rul. 70-224, in which B acquired all the assets of Target for A's stock. Since A intended to acquire the Target assets, and had "dominion and control" over them, A was deemed to be the acquiring corporation that "dropped" the assets so acquired to B. The transaction was viewed as a reorganization under Sec. 368(a)(1)(C) and (a)(2)(C), rather than a "C" reorganization for parent's stock. Combining the principle of Rev. Rul. 70-224 with the statutory permissibility of using parent stock allowed B to be the deemed acquiring corporation for A's stock, yet B would cause the Target assets to be directly transferred to C. Thus, grandparent stock was effectively used.

In IRS Letter Rulings 8702056 and...