Rev. Rul. 58-92

Advice has been requested whether certain stock and securities distributed in complete liquidation of a corporation in 1956 should be considered `stock or securities acquired by the corporation after December 31, 1953,' within the meaning of section 333(e)(2) of the Internal Revenue Code of 1954.

The stock and securities in question had been acquired by the corporation upon its organization in July 1955 from its sole shareholder in a transaction to which section 351 of the Code applies. The basis of the stock and securities in the hands of the shareholder (450 x dollars) became their basis to the corporation under the provisions of section 362(a)(1) of the Code. The corporation's holding period for the stock and securities, determined under section 1223(2) of the Code, included the period commencing prior to December 31, 1953, during which the shareholder had held such stock and securities before their transfer to the corporation.

In 1956, the corporation adopted a plan of liquidation and distributed all of its property (including the stock and securities) to its sole shareholder within one calendar month in complete redemption of its outstanding capital stock. The shareholder made and filed a timely election to have the gain on the liquidation recognized in accordance with the provisions of section 333(e) of the Code. At the time of the liquidation, the stock and securities had a fair market value of 1,200 x dollars.

Section 333 of the Code provides, in effect, that, under certain conditions, if the shareholders of a corporation so elect, gain is not recognized to them on the distribution of the corporation's property in kind on a liquidation. The shareholders are, however, taxed as though they had received a cash dividend equal to the earnings and profits of the corporation and, in addition, gain is recognized to the extent that cash, and stock or securities acquired after December 31, 1953 (`cut-off' date), exceed the earnings and profits of the corporation.

The question presented in the instant case is whether the stock and securities distributed in liquidation, though not acquired by the corporation until July 1955 upon its incorporation, can be regarded as having been acquired by the corporation prior to 1954, in view of the fact that the corporation's sole shareholder had owned them prior to that time and had transferred them to the corporation in a nontaxable transaction, with his basis and holding period going over to the corporation.

The predecessor statutes to section 333 of the Code were temporary relief statutes enacted from year to year and made effective for short periods of time. See section 112(b)(7) of the Revenue Act of 1938, 52 Stat. 447 at 485; section 120(a) of the Revenue Act of 1943, 58 Stat. 21 at 40, 26 U.S.C. 112(b) (adding section 112(b)(7) to the Internal Revenue Code of 1939); section 206(a) of the Revenue Act of 1950, 64 Stat. 906 at 931, 26 U.S.C. 112(b); section 316(a) of the Revenue Act of 1951, 65 Stat. 452 at 493, 26 U.S.C. 112(b); and section 101 of the Technical Changes Act of 1953, 67 Stat. 615, 26 U.S.C. 112, C.B. 1953-2, 485 (amending the 1939 Code). Each of the five predecessor statutes included a cut-off date in advance of, or at the time of, its effective date so that cash on hand at the time the statute was enacted could not be used to purchase stock and securities and thus avoid part of the tax resulting from a liquidation. All of such predecessor statutes appear to have been drawn for the benefit of corporations already in existence when they were enacted and were intended to facilitate the liquidation of established personal holding companies.

Section 333 is made a permanent part of the Internal Revenue Code of 1954 and specifies that the cut-off date shall be the last day of 1953 (a date before the 1954 Code became effective). It seems clear that under the statute any stock or securities purchased by a corporation after that date will be treated the same as cash.

The statute is not on its face restricted to purchases, but refers only to stock or securities `acquired.' The Internal Revenue Service has held that, for purposes of section 333(e)(2) of the Code, the acquisition date of stock received in a nontaxable exchange pursuant to a plan of reorganization is not the date of the exchange, but is the date on which the stock surrendered in the exchange was acquired. See Rev. Rul. 56-171, C.B. 1956-1, 179. Likewise, for purposes of section 333(e)(2), the acquisition date of stock received in a distribution to which section 305(a) of the Code applies is the date on which was acquired the stock with respect to which the dividend stock was received. The receipt of new shares in such a nontaxable exchange or distribution is not regarded as an `acquisition' within the meaning of the statute, since such transactions are merely changes in the nature or form of stock already owned by the liquidating corporation.

However, the instant case involved the acquisition by a corporation of stock and securities in a section 351 exchange which took place after the cut-off date. The sole question presented, therefore, is whether such an acquisition is within the terms of the statute.

Congress provided that stock or securities acquired during the effective periods of the earlier statutes were to be treated like cash and it has now provided that stock or securities acquired while the 1954 Code is in effect are always to be treated like cash, since the new relief statute is always effective. Reading the word `acquired' without qualification, the statute thus states that stock or securities distributed in a section 333 liquidation are always equivalent to cash unless such stock or securities were owned by an existing corporation on December 31, 1953 (or were received, with respect to stock or securities owned on that date, in a nontaxable exchange pursuant to a plan of reorganization or as a nontaxable stock dividend). Consequently, if stock or securities are now transferred to a newly formed corporation in exchange for stock, the ultimate result on a liquidation will be that gain resulting from an appreciation in the value of such stock or securities will not be exempt from tax under section 333 of the Code. In effect, therefore, such stock or securities will be treated as if they had been purchased by the corporation with contributed cash, and the fact that the holding period for the stock or securities, determined under section 1223(2) of the Code, commenced prior to December 31, 1953, is immaterial.

In view of the foregoing, it is held that the stock and securities acquired by the corporation upon its incorporation in July 1955 were acquired by it after December 31, 1953, within the meaning and for the purposes of section 333(e)(2) of the Code.