Rev. Rul. 58-241

The Internal Revenue Service has been requested to explain the relationship of sections 337 and 341 of the Internal Revenue Code of 1954 in a corporate liquidation.

Section 341 of the Code relating to collapsible corporations provides, in part, as follows:

(a) TREATMENT OF GAIN TO SHAREHOLDERS.-Gain from-

(1) the sale or exchange of stock of a collapsible corporation,

(2) a distribution in partial or complete liquidation of a collapsible corporation, which distribution is treated under this part as in part or full payment in exchange for stock, and

(3) a distribution made by a collapsible corporation which, under section 301(c)(3)(A), is treated, to the extent it exceeds the basis of the stock, in the same manner as a gain from the sale or exchange of property, to the extent that it would be considered (but for the provisions of this section) as gain from the sale or exchange of a capital asset held for more than 6 months shall, except as provided in subsection (d), be considered as gain from the sale or exchange of property which is not a capital asset.

(b) DEFINITIONS.-

(1) COLLAPSIBLE CORPORATION.-For purposes of this section, the term `collapsible corporation' means a corporation formed or availed of principally for the manufacture, construction, or poduction of property, for the purchase of property which (in the hands of the corporation) is property described in paragraph (3), or for the holding of stock in a corporation so formed or availed of, with a view to-

(A) the sale or exchange of stock by its shareholders (whether in liquidation or otherwise), or a distribution to its shareholders, before the realization by the corporation manufacturing, constructing, producing, or purchasing the property of a substantial part of the taxable income to be derived from such property, and

(B) the realization by such shareholders of gain attributable to such property.

Section 337 of such Code relating to gain or loss on sales or exchanges in connection with certain liquidations reads in part:

(a) GENERAL RULE.-If-

(1) a corporation adopts a plan of complete liquidation on or after June 22, 1954, and

(2) 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 such 12-month period.

*

(c) LIMITATIONS.-

(1) COLLAPSIBLE CORPORATIONS AND LIQUIDATIONS TO WHICH SECTION 333 APPLIES.-This section shall not apply to any sale or exchange-

(A) made by a collapsible corporation (as defined in section 341(b)), or * * *.

Section 1.337-1 of the Income Tax Regulations states in part that sales or exchanges made by a collapsible corporation (as defined in section 341(b)) are excluded from the operation of section 337 by section 337(c). Accordingly, section 337 does not apply to any sale or exchange of property whenever the distribution of such property in partial or complete liquidation to the shareholders, in lieu of such sale or exchange, would have resulted in the taxation of the gain as ordinary income within the purview of section 341, but for the application of section 341(d) of the Code.

In effect, the foregoing provision of the regulations constitutes a test to be applied to determine whether a corporation may avail itself of the benefits of section 337 of the Code. Thus, if in lieu of selling all of its property the corporation had liquidated in kind and the gain on liquidation in kind would have been taxable as ordinary income to the stockholders pursuant to section 341, but without application of the limitation provisions of section 341(d), such corporation is a collapsible corporation within the definition of section 341(b) and cannot avail itself of the benefits of section 337.

If the corporation did in fact sell all of its property with a view to taking advantage of section 337 and, upon applying the test of the regulations set forth above, it was found that such corporation was a collapsible corporation, the corporation, not being able to avail itself of the benefits of section 337, would realize taxable income by reason of the sale of its property at a gain. Since the corporation would have realized all of the taxable income from its property, it would not meet the definition of section 341(b). Accordingly, the gain, if any, to the stockholders upon liquidation would not constitute ordinary income within the purview of section 341.

The reason for the limitation found in section 337(c)(1)(A) of the Code was to prevent the existence of a loophole through which a collapsible corporation could escape tax on the sale of its property, yet have the shareholders pay the tax on their liquidation gain at long-term capital gain rates. However, under section 112(a) of the Internal Revenue Code of 1939, the corporation could have sold its property and become liable for the corporate tax on the gain from the sale of such property. Therefore, had the corporation sold its property and realized all of the the taxable income, the gain to the shareholders would not have been taxable as ordinary income under section 117(m) of the 1939 Code.

The same rule applies under the 1954 Code. If on an `in-kind' liquidation the corporation would be considered a collapsible corporation under section 341, it can, by selling all its property, realize the taxable income from such property. In that way the gain to its shareholders would not be taxable to to them as ordinary income under section 341.

Accordingly, since section 337 cannot be availed of by a collapsible corporation, as defined in section 341(b), the gain on the sale of the property would constitute taxable income to that corporation.