In this specific case, the taxpayer was trying to escape the realm of tax-free organizations. The taxpayer wanted the step up in basis that a purchase of assets would provide. However, due to the form of the plan that Reliance followed, it almost qualified itself for this treatment despite all of the planning and maneuvering.

            In contrast, the Commissioner wanted tax-free treatment in order to prevent the step up in basis. The form suggested that the transaction was in reality a reorganization, only a question of which type of reorganization remained. However, the step transaction doctrine, a tool generally reserved for the Commissioner’s use, was used to disqualify the transaction as a reorganization. It is in this aspect that a useful warning can be found. Even if the form of the transaction appears to qualify, the taxpayer should be careful and examine the entire transaction in its entirety, in order to ensure that it qualifies for reorganization treatment. In this case, the control requirements would have been easy to reach, compared to most other reorganization requirements, but even this amount was not met when essentially all the shareholders changed from the beginning of the transaction to the end of the transaction.

Attribution Rules

            When §368 defines the control requirements for a D reorganization, it sends the taxpayer to §304(c). On the surface, §304(c) appears to be a straightforward requirement of 50% ownership:

For purposes of this section, 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.

However, within this section the attribution rules of §318 are included with a modification that works to make the rule even more encompassing. This is done by lowering the corporate ownership requirement found in §318(a)(2)(C) from 50% to 5%, thereby including almost any associated corporations in the attribution. Revenue Ruling 77-427, while not dealing directly with reorganizations, does deal with the complexities of the §304(c) attribution rules. An examination of this key Revenue Ruling follows.


            The main facts of this ruling include two corporations. Individuals A, B, own Corporation X and C. Corporation Y is owned by B, D and E. A owns 40% of X. B owns 20% of X and 45% of Y. C owns 40% of X. D owns 30% of Y. E owns 25% of Y. Also A is the parent of B, and C is the parent of D. All three shareholders of X  sell all of their shares to the shareholders of Y for cash.

The original structure is shown in the diagram below. Within this diagram, the amount that each individual owns directly in the associated corporation is list. In the accompanying table, the amount that each individual owns in each corporation directly and indirectly is shown. These amounts are derived from the rules set forth in the attribution rules of §318.