Rev. Rul. 58-565

Advice has been requested whether a distribution by a corporation to its shareholders of an amount equal to the proceeds from a sale of one of its buildings qualifies as a partial liquidation within the meaning of section 346(a) of the Internal Revenue Code of 1954.

The corporation was organized in 1933 for the purposes of owning, building, leasing, renting, and otherwise dealing in real property. Early in 1952, its principal assets consisted of three store buildings and one parking lot, all purchased prior to 1937 and all rented. In December 1952, the corporation sold one of the store buildings for 125 x dollars, 35 x dollars down and a mortgage of 90 x dollars. The mortgage was amortized at the rate of 9 x dollars per annum for four years and, in 1957, the entire balance of 54 x dollars was paid. The net proceeds of the sale, after deduction of Federal income taxes and the expenses of the sale, were in the amount of 93 x dollars.

There was no mortgage on the property sold at the time of the sale. The proceeds of the sale were retained by the corporation and used for repayment of existing corporate indebtedness.

No plan of partial liquidation was adopted until 1957. That year the corporation and its shareholders adopted an alleged plan of partial liquidation. The corporation then distributed 93 x dollars (a sum equal to the proceeds of the sale) in redemption of a portion of its outstanding stock.

Section 346 of the Code, defining a partial liquidation, provides, in part:

(a) IN GENERAL.-For purposes of this subchapter, a distribution shall be treated as in partial liquidation of a corporation if-

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(2) the distribution is not essentially equivalent to a dividend, is in redemption of a part of the stock of the corporation pursuant to a plan, and occurs within the taxable year in which the plan is adopted or within the succeeding taxable year, including (but not limited to) a distribution which meets the requirements of subsection (b).

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(b) TERMINATION OF A BUSINESS.-A distribution shall be treated as a distribution described in subsection (a)(2) if the requirements of paragraphs (1) and (2) of this subsection are met.

(1) The distribution is attributable to the corporation's ceasing to conduct, or consist of the assets of, a trade or business which had been actively conducted throughout the 5-year period immediately before the distribution, of the distribution and was not acquired by the corporation within such period in a transaction in which gain or loss was recognized in whole or in part.

(2) Immediately after the distribution the liquidating corporation is actively engaged in the conduct of a trade or business, which trade or business was actively conducted throughout the 5-year period ending on the date of the distribution and was not acquired by the corporation within such period in a transaction in which gain or loss was recognized in whole or in part.

The distribution of the proceeds of the sale of one of several businesses, actively conducted for five years, may qualify as a distribution under section 346(a)(2) and section 346(b) of the Code. However, for a distribution to qualify under section 346(b), the Income Tax Regulations provide in section 1.346-1(c)(2) that the proceeds of the sale of the assets of a business must be distributed as soon after the sale as reasonably possible. In addition, the requirements of section 346 are not satisfied if the proceeds of the sale are used in the corporation's remaining business for any period of time. In the instant case, the property was sold in 1952, the payments being made over a five-year period. The down payment and the annual payments were not distributed and were not segregated, but were instead used in the corporate business and to pay existing corporate liabilities. Thus, section 346 does not apply to the later distribution of an amount equal to the proceeds of the sale in view of the use of the bulk of the sale proceeds in the corporate business and in view of the lapse of time.

Accordingly, it is held that the distribution in 1957 by the corporation of an amount equal to the proceeds of a sale, which was consummated in 1952, in redemption of a portion of its outstanding stock does not constitute a distribution in partial liquidation within the meaning of section 346(b) of the Code, when the proceeds of the sale were used by the corporation in its remaining businsss. Hence, pursuant to the provisions of section 302(d) of the Code, such distribution is treated as a dividend under section 301(a) of the Code to the extent of the earnings of the corporation as defined in section 316 of the Code.