Opinion ID: 387153
Heading Depth: 2
Heading Rank: 1

Heading: Requirements of Section 368(a)(1)(D)6

Text: 24 There are four basic requirements in § 368(a)(1)(D): (1) control; (2) distribution of stock or securities; (3) transfer of assets; and (4) a plan of reorganization. Control of the transferee corporation requires that there be shareholder control of 80 percent of the total combined voting power and 80 percent of the total nonvoting shares of the corporation. I.R.C. § 368(c). The control element is clearly satisfied here as appellants owned all of the capital stock of both Exeter and Port Dry Kiln at all relevant times. 25 No stock or securities were distributed to the Roses. But despite the language in § 368(a)(1)(D), courts have held that a distribution of stock or securities is not necessary where ownership of the transferor and transferee corporations is identical, because such a distribution would be a mere formality. Atlas Tool Co. v. Commissioner, 614 F.2d 860, 865 (3rd Cir.), cert. denied, --- U.S. ----, 101 S.Ct. 110, 66 L.Ed.2d 43 (1980); Davant v. Commissioner, 366 F.2d 874, 886-87 (5th Cir. 1966), cert. denied, 386 U.S. 1022, 87 S.Ct. 1370, 18 L.Ed.2d 460 (1967). Since the Roses owned all the stock of both the transferor and transferee corporations we hold that no distribution of stock or securities was necessary to meet the requirements of § 368(a)(1)(D). 26 A distribution pursuant to § 368(a)(1)(D) must also qualify under § 354 or § 355 in order for § 356 to be applicable. Section 355 concerns the distribution of stock or securities of a controlled corporation and is not applicable to this case. 27 Section 354(a)(1) provides that (n)o gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. 7 28 However, § 354(b)(1) limits the application of § 354(a)(1) by requiring that: 29 Subsection (a) shall not apply to an exchange in pursuance of a plan of reorganization within the meaning of section 368(a)(1)(D), unless 30 (A) the corporation to which the assets are transferred acquires substantially all of the assets of the transferor of such assets. (Emphasis added.) 31 Generally, the substantially all requirement is determined by focusing on the transfer of the operating assets by the transferor and not on the non-operating or liquid assets such as cash. In this case all the operating assets the three kilns and leases were transferred. Only the cash was not transferred. In Moffatt v. Commissioner, 363 F.2d 262 (9th Cir. 1966), cert. denied, 386 U.S. 1016, 87 S.Ct. 1370, 18 L.Ed.2d 453 (1967), this court held that the transfer of key personnel and operating assets qualified as substantially-all, even though non-operating physical assets such as land were retained. But in Swanson v. United States, 479 F.2d 539 (9th Cir. 1973), this court affirmed a district court finding that the failure to transfer liquid assets precluded satisfaction of the substantially-all requirement. Swanson is distinguishable from the present case because it was grounded on the district court's holding that the liquid assets were essential operating assets of the corporation. Swanson involved an underground pipe construction business with a need for liquid assets to secure required bonding. 32 In this case, the district court held that all the operating assets were transferred. Appellants give no reasons for finding the cash to be an essential operating asset of Port Dry Kiln. We find that the requirement of transferring substantially all of the Port Dry Kiln assets has been met. 33 Section 354(b)(1)(B) requires that the distribution of securities in a Section D reorganization be in pursuance of the plan of reorganization. A formal written document is not necessary. The district court found that the minutes of the November 21, 1968 meeting of the Board of Directors of Port Dry Kiln authorizing the dissolution of that corporation and the subsequent transfer of its operating assets to Exeter and the payment of the sale proceeds to appellants provided sufficient evidence that the distribution was a part of a plan of reorganization. The sale and distribution was clearly part of an overall plan to have the lumber-drying operation done by Exeter. The controlling shareholders chose to call the transaction a plan of liquidation. If what resulted was in fact a plan of reorganization, the chosen label is not dispositive. Atlas Tool Co. v. Commissioner, supra, at 866; Wilson v. Commissioner, 46 T.C. 334, 345 (1966). 8 34 We conclude, as did the district court, that the transaction which resulted in the distribution of the $318,818 to the Roses met all the statutory requirements of a § 368(a)(1)(D) reorganization.