Attribution Rules

            Section 318(a)(1)(A) directs that an individual is considered to own the stock of his or her parents or child; “in general, an individual shall be considered as owning the stock owned, directly or indirectly, by or for […] his children, grandchildren, and parents.” So for this example A is considered to own everything B owns and B is considered to own everything A owns. The same is true for C and D. Therefore, A, B, and C directly own 100% of X and are deemed to indirectly own 75% of Y. The Revenue Ruling examined the consequences the attribution rules only within the context of a §304 distribution, in this case the attribution rules would also determine if the transaction could qualify as a D reorganization. Since A, B, and C are deemed to own more than 50% of Y, and all of X the control requirements would be met for a acquisition of Y by X. At the same time, B, D, and E own all of Y and are deemed to own all of X, so a reorganization in which Y acquires X would also be valid.

            The portion of §318 that was changed by the controlling section, 304, is the portion that relates to corporation control. Without the §304 change, §318(a)(2)(C) reads:

If 50 percent or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such corporation shall be considered as owning the stock owned, directly or indirectly, by or for such person.

However, §304(c)(3)(B)(i) changes the 50% to a 5% rule. So in the above example, if the any one of the individuals that owned either X or Y in the above example were actually corporations, then the shareholders of the corporations would generally not be deemed to own the stock of X or Y as the corporations do not own enough of the stock. However, with the modifications of §304, all of the owning corporations would have enough of an interest in X or Y for their shareholders to be deemed to own the stock as well.

Single Owner Reorganizations

            For the purposes of the control requirement, §1.368-2T(l)(2)(i) allows for the a single owner to be in control of both the transferor corporation and the transferee corporation. Further, the regulation allows for a reorganization to still occur even if there is no stock issued, as long as both corporations are owned by the exact same shareholders. Example 1 in the same section provides the following scenario, “A owns all the stock of T and S. The T stock has a fair market value of $100x. T sells all of its assets to S in exchange for $100x of cash and immediately liquidates.” The example goes on to state that this is a valid D even though there was no stock issued since A owns all of both corporations. In terms of trying to qualify for a D reorganization, this regulation makes it easier for an individual or group owning two corporations to qualify. However, when a taxpayer is trying to achieve a liquidation or other non-reorganization transaction, this can cause problems as the taxpayer might inadvertently qualify for a reorganization instead. This is what occurs in the case of Ringwalt v. U.S.


            Mr. Ringwalt, originally formed an insurance company called R&L, Inc. At the time he owned 84% of the company and acted as president. Ten years later, he created a trust, of which he would be the trustee, and one of the assets were all his shares of R&L, Inc. The trust was only to last for ten years during which time, all of the income was distributable and taxable to his children. However, he maintained a reversionary control over the corpus, and held several powers of administrative nature as the trustee.

            During the ten-year period, R&L, Inc sold its interest in a subsidiary to a third party, resulting in $700,000 gain. R&L, Inc soon after authorized its liquidation. In the same period, a new company formed with the same shareholders as R&L, Inc, called R&L, Co. The only difference in shareholders is that Ringwalt owned 84% of R&L, Co. while the trust still owned 84% of R&L, Inc. R&L, Co, then purchased all of R&L, Inc’s assets including the name, and continued the line of business.

Once the assets were purchased, R&L, Inc distributed the cash to the shareholders, including $932,000 to Ringwalt’s short-term trust. The shareholders of R&L, Inc treated the distribution as a distribution in a liquidation, and report long term capital gains.

The IRS argues that this transaction was not a liquidation, but instead a reorganization. Under this scenario, the distribution would be a dividend, and would have resulted in ordinary income to the shareholders.