Rev. Rul. 55-517

Advice has been requested as to the Federal income tax consequences to a corporation and its shareholders where property is being replaced in accordance with section 1033(a)(3)(B) and a plan is adopted to liquidate the corporation.

The M corporation is engaged in the real estate business. It has only one class of stock outstanding, all of which is owned by a husband and his wife. The corporation suffered extensive damage to its property as a result of the hurricane and flood of 1954, and the amount of insurance payments which will be collected for damages will exceed the basis of the property damaged. Therefore, the corporation has elected on its income tax return for the fiscal year in which the damage occurred to use the insurance proceeds to replace the damaged property.

Pursuant to such election, the corporation has acquired a parcel of land and entered into a contract with a contractor to build a structure similar in service and use to the property destroyed. The cost of the new construction will exceed the insurance proceeds received from the involuntary conversion. However, the corporation is considering adopting a plan of liquidation before the new structure is completed and to complete its liquidation within the 12-month period during which time the replacement building is expected to be completed.

The nonrecognition of gain provisions of section 1033 of the Internal Revenue Code of 1954, as they relate to involuntary conversions of property which occur after December 31, 1950, provide, in effect, that where property is compulsorily or involuntarily converted and the taxpayer, during the period specified, purchases other property similar or related in service or use to the property so converted, at the election of the taxpayer, the gain shall be recognized only to the extent that the money realized from such conversion exceeds the cost of the replacement property.

As provided in the same section of the Code, the period within which such property must be replaced is the period beginning with the date of the disposition of the converted property, or the earliest date of the threat or imminence of requisition or condemnation of the converted property, and ending one year after the close of the first taxable year in which any part of the gain upon the conversion is realized.

Section 337(a) of the Code relating to gain or loss on sales or exchanges in connection with certain liquidations provides, in part, that under the general rule if a corporation adopts a plan of complete liquidation on or after June 22, 1954, and within the 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation are distributed in complete liquidation, less assets retained to meet claims, then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property within the 12-month period.

In the instant case and upon the basis of the facts presented, it is held that where property is involuntarily converted and the corporation elects to replace such property within the period prescribed by section 1033(a)(3)(A) and (B) of the Code, the fact that the corporation subsequently adopts a plan of liquidation under sections 337(a) and/or 331(a)(1) of such Code, before replacement of the property, will not preclude the application of section 1033 of the Code, provided the replacement is completed prior to the expiration of the replacement period and before completion of the corporate liquidation.

Gain or loss will be recognized to the stockholders measured by the difference between the cost or other basis of the stock surrendered and the fair market value of the assets distributed in liquidation under sections 331(a)(1) and 1001 of the Internal Revenue Code of 1954