CCA 201315020: Insolvency does not by itself disqualify a tax-free merger

Plain-English summary

Chief Counsel advice states that a merger otherwise qualifying for tax-free treatment is not disqualified merely because one corporation is insolvent. The memo separately explains that stock received in excess of the value of stock surrendered is treated outside the reorganization and taxed according to the facts. Possible characterizations include compensation, a gift, payment of an obligation, or an inducement to enter the transaction. The advice cites a Tax Court decision and a revenue ruling for these conclusions.

Ruling snapshot

• Question: Does a corporation's insolvency by itself disqualify an otherwise tax-free merger?
• Outcome: Advice given, insolvency alone does not disqualify the merger.
• Key authorities: IRC § 368; Norman Scott, Inc. v. Commissioner, 48 T.C. 598 (1967); Rev. Rul. 74-269.

Full text (IRS public release)

ID: CCA_2013030514541353 Number: 201315020
Release Date: 4/12/2013
Office: ----------------------
UILC: 368.05-00

From: ---------------
Sent: Tuesday, March 05, 2013 2:54:14 PM
To: ------------------------------------
Cc:
Subject:

Under current law, a merger otherwise qualifying as tax-free is not disqualified because one of the corporations is insolvent. See Norman Scott, Inc. v. Commissioner, 48 T.C. 598 (1967), acquiescence in result only, 1967 AOD LEXIS 104. However, the value of stock received that is in excess of the value of stock surrendered is treated as received separately from the reorganization and taxed accordingly, e.g., as compensation, a gift, a payment to satisfy an obligation, an inducement to enter into the transaction or for whatever purpose the facts indicate. See, e.g., Rev. Rul. 74-269, 1974–1 C.B. 87.