How to beat Rev. Rul. 68-55.

• Author: Bailine, Richard W.
• Position: IRC section 351 allocation method

Rev. Rul. 68-55 addressed the allocation of boot received in a Sec. 351 transfer, and generally required that gain or loss be computed on an asset-by-asset basis and allocated in proportion to relative asset values. Some of the adverse effects of this requirement can be avoided by interposing a holding company into the transaction.

To illustrate the allocation method adopted by Rev. Rul. 68-55, suppose individual A owns two parcels of real estate, Blackacre and Whiteacre. Blackacre has a fair market value (FMV) of $100 and a tax basis of $100. Whiteacre has an FMV of $100 and a tax basis of $0. If A transfers these two parcels to Newco in exchange for $100 of Newco stock and $100 cash, Rev. Rul. 68-55 required A to allocate the $100 boot received between the two assets transferred. Thus, A would be deemed to have received $50 of stock and $50 of cash for each. This means that A must recognize no gain with respect to Blackacre and $50 of gain with respect to Whiteacre.

Can A avoid this result? Suppose A were to specify that Whiteacre was being contributed to Newco in exchange for Newco stock and that Blackacre was being contributed to Newco in exchange for cash. Could such explicit allocation override the procedure described in Rev. Rul. 68-55? The answer is no; see Rev. Rul. 85-164. Further, Rev. Rul. 85-164 seemed to foreclose attempts to separate the transfers in time to achieve an explicit allocation, "if the transfers were part of a single integrated transaction."

There is, however, a structure that would permit A to place Blackacre and Whiteacre in corporate solution without recognizing gain. A could transfer Whiteacre to Newco solely for Newco stock (a tax-free Sec. 351 transaction). Newco could then transfer Whiteacre to a newly formed, wholly...