Rev. Rul. 59-240

Advice has been requested with respect to the tax consequences for Federal income tax purposes of corporate distributions under the following circumstances.

R, a corporation whose stock is widely held, sold all of its operating properties and business in December 1954. Immediately prior to the sale, R had only an insubstantial amount of liquid assets. After the sale R had only cash and notes receivable. At a special stockholders' meeting in March 1955, the board of directors was authorized to:

(a) liquidate the corporation,

(b) distribute 20 x dollars a share as the first distribution in liquidation, and

(c) change the par value of the outstanding capital stock (all common) to no par value, in order to facilitate the distribution of liquidating dividends under state law.

Accordingly, each outstanding share of capital stock was exchanged for 20 x dollars and one no par value share. Each new stock certificate had a block insert with the heading `Liquidating Dividends Have Been Paid On The Share Represented By This Certificate in the Amounts Indicated Below' and the first such dividend in the amount of 20 x dollars per share was recorded in the first space below the heading. After this distribution, the corporation had left approximately 10 x dollars in cash and receivables per share.

A new board of directors was elected prior to completion of the liquidation and upon its recommendation, the stockholders, late in 1955, voted to discontinue complete liquidation and to modify the plan to provide for partial liquidation instead. Although, as before, the bulk of the corporate funds were to be distributed as liquidating didivends, under the modified plan, 1 x dollars per share were to be retained and used in the purchase of a new business. The new business was quite different from the one previously conducted, and had much smaller capital requirements. The subsequent distributions were made within the year of adoption of the plan and the succeeding taxable year and were duly recorded on the stock certificates when made.

Under the circumstances described above, the distribution of 20 x dollars per share is considered to meet the requirements of section 346(a)(2) of the Internal Revenue Code of 1954. Since the sale of the old business and the acquisition of a new and much smaller one reduced the corporation's capital requirements to 1/30 of what they had formerly been, and since the 20 x dollar distribution (out of the proceeds of the sale of the old business) was one in a series which ultimately reduced the corporation's capital in accordance with its reduced requirements, the distribution is held to be `not essentially equivalent to a dividend' within the meaning of section 346(a)(2). In reaching that conclusion, the drastic reduction in capital requirements and the distribution of the proceeds of the sale of the old business is considered as determinative. Compare Ernest F. Becher v. Commissioner , 22 T.C. 932, affirmed on other grounds 221 Fed.(2d) 252; Estate of Charles D. Chandler v. Commissioner , 22 T.C. 1158, affirmed 228 Fed.(2d) 909. For purposes of determining whether the distribution was essentially equivalent to a dividend, the original corporate intention to distribute all the corporate assets is not considered significant.

The initial distribution of 20 x dollars per share is also held to have been made pursuant to a `plan' within the meaning of section 346(a)(2). The adoption of a plan of liquidation after a distribution has been made will not qualify the distribution under section 346. However, where, as here, the management characterizes a distribution as a liquidating dividend by adopting a plan of complete liquidation, and there is a surrender of stock in connection with such distribution, subsequent modification of the plan to one which qualifies as a plan of partial liquidation will not cause the previous distributions to be treated as dividends.

For the foregoing reasons, the initial distribution is held to qualify as a distribution in partial liquidation under section 346(a)(2) of the Code. For similar reasons, those distributions made subsequent to the adoption of the modified plan are also considered to qualify.

The amount of stock deemed to be surrendered at the time of each distribution will be determined by the relationship between the fair market value of the assets distributed at that time and the fair market value of the stock immediately before that distribution.