Rev. Rul. 61-96

Advice has been requested as to the tax treatment of a distribution by a subsidiary corporation to its parent corporation of bonds of the parent corporation acquired by purchase.

A subsidiary corporation, wholly-owned by its parent, acquired through cash purchases in the open market certain bonds of the parent corporation due January 1, 2000. Later the subsidiary corporation made a distribution in kind to its parent corporation consisting of the parent's bonds in the face amount of 1,400 x dollars. At the time of this distribution, the total fair market value of the parent's bonds so distributed was 980 x dollars. The subsidiary corporation had an adjusted basis for these bonds of 1,200 x dollars. The parent and subsidiary corporation did not join in filing a consolidated return in the year of distribution. The parent (debtor) corporation was fully solvent before the distribution which resulted in a 1,400 x dollar reduction in its indebtedness. The subsidiary had earnings and profits available for the payment of dividends in an amount in excess of the cost to it of the bonds distributed.

Section 301(a) of the Code provides that `* * * a distribution of property (as defined in section 317(a)) made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in subsection (c).'

Section 301(b)(1) of the Code provides, in part, that `* * * the amount of any distribution shall be-

(B) CORPORATE DISTRIBUTEES.-If the shareholder is a corporation, the amount of money received, plus whichever of the following is the lesser:

(i) The fair market value of the other property received; or

(ii) The adjusted basis (in the hands of the distributing corporation immediately before the distribution) of the property received * * *.

Section 317(a) of the Code defines `property' for the purposes of corporate distributions; and section 1.317-1 of the Income Tax Regulations provides that the term `property' means any property (including money, securities, and indebtedness to the corporation) other than stock, or rights to acquire stock, in the corporation making the distribution.

Section 61(a) of the Code states that gross income means all income from whatever source derived, including income from discharge of indebtedness. Section 1.61-12 of the Income Tax Regulations states, in part, that the discharge of indebtedness, in whole or in part, may result in the realization of income.

In view of the foregoing provisions of the statute and regulations, it is held as follows:

(1) The distribution by the subsidiary corporation to the parent corporation of the parent's bonds in the face amount of 1,400 x dollars constitutes a distribution of property within the meaning of section 301(a) of the Code in the amount of 980 x dollars (the lesser of the fair market value of the property at the date of distribution or the adjusted basis of such property to the subsidiary corporation). Such amount is taxable to the parent corporation in accordance with the provisions of section 301(c) of the Code.

(2) The difference between the amount of the distribution received from the subsidiary corporation under (1) above and the face amount of the bonds received (420 x dollars) in income to the parent corporation from the discharge of indebtedness which is includible in gross income as provided in section 61(a)(12) of the Code.

(3) The earnings and profits of the subsidiary corporation must be reduced by the adjusted basis in its hands of the bonds distributed (1,200 x dollars), as required by section 312(a) of the Code.

(4) The subsidiary corporation realizes no taxable income or deductible loss by reason of its distribution of the parent's bonds (section 311(a) of the Code).