Rev. Rul. 57-243

Advice has been requested whether a gain of a parent corporation from the liquidation of its subsidiary corporation is a gain from the `sale or exchange' of its subsidiary's stock within the meaning of section 337 of the Internal Revenue Code of 1954. That section provides that if a corporation adopts a plan of complete liquidation and, within 12 months after the date on which the plan is adopted, distributes all of its assets, 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.

A personal holding company, owned entirely by a single shareholder, had assets consisting solely of 60 percent of the stock of its subsidiary corporation and cash. In the the current year, the subsidiary entered into a contract to sell all of its assets to an unrelated corporation for cash. Before consummating the sale to the latter, the subsidiary corporation adopted a plan of liquidation requiring complete liquidation within one year from the date of the adoption of the plan. Prior to the receipt of any liquidating dividend from the subsidiary, the parent also adopted a plan of complete liquidation. Within 12 months from the adoption adoption of this plan, the parent corporation received all the cash and property to which it was entitled on the liquidation of the subsidiary and distributed all this, as well as all the rest of its cash and property, in redemption of all its own stock in complete liquidation.

At issue in Revenue Ruling 56-372, C.B. 1956-2, 187. There, the Service held that the receipt of fire insurance proceeds from the complete destruction of a building by fire, resulting in an involuntary conversion, did not constitute a `sale' for the purpose of obtaining nonrecognition of gain or loss benefits under section 337(a) of the Code, since the provisions of section 1231(a), relating to the determination of capital gains and losses in the case of property used in a trade or business and involuntary conversions, were not effective to characterize the transaction as a sale or exchange under section 337 of the Code.

Section 331(a) of the Code provides that amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock. The application of this section is not limited to any particular section of the Code. Therefore, it pertains to section 1222 of the Code which defines various types of capital transaction as resulting from the `sale or exchange' of a capital asset. This has been the historic application of section 331 of the 1954 Code and its predecessor, section 115(c) of the 1939 Code, ever since this concept was first introduced as section 201(c) of the Revenue Act of 1924. At that time the Senate Report No. 398, Sixty-eighth Congress, First Session, C.B. 1939-1 (Part 2), at page 274 stated:

`* * * The existing law has no provision similar to subdivision (c) of the bill, but the Treasury has construed the existing law as taxing liquidating dividends, not as capital gains, but as dividends subject to the surtax rates. The bill treats a liquidating dividend as a sale of the stock, with the result that the gain to the taxpayer is treated not as a dividend subject only to the surtax but as a gain from the sale of property which may be treated as a capital gain. The treatment of liquidating dividends under the bill is substantially the same as provided for in the Revenue Act of 1918. A liquidating dividend is, in effect, a sale by the stockholder of his stock to the corporation; he surrenders his interest in the corporation and receives money in place thereof. Treating such a transaction as a sale and within the capital gain provisions is consistent with the entire theory of the Act and, furthermore, is the only method of treating such distributions which can be easily administered.'

Since 1924, liquidations of corporations have been treated as exchanges of stock resulting in capital gains or losses. See Harold T. White, Exr. (Alexander M. White, Est.) v. United States , 305 U.S. 281, Ct. D. 1372, c.B. 1938-2, 238; Helvering v. Chester N. Weaver , 305 U.S. 293, Ct. D. 1371, C.B. 1938-2, 220; and compare Helvering v. William Flaccus Oak Leather Co. , 313 U.S. 247, Ct. D. 1510, C.B. 1941-1, 324.

Section 337 adopts the phrase, `sale or exchange' of property, in the 1954 Code, and is identical to the language used in section 1222 of the Code to define a capital transaction. There is a valid distinction between the involuntary conversion which was the subject of Revenue Ruling 56-372, supra , and the liquidation in the instant case. Section 1231 of the Code has been characterized as a computation section in that it takes certain transactions and provides that when the net results of such transactions during the course of a year is a gain, then the gain or loss on each transaction shall be considered as a gain or loss from the sale or exchange of a capital asset held for more than six months. Correspondingly, if the net result of those transactions is a loss, then each gain or loss shall not be considered as a gain or loss from the sale or exchange of a capital asset. However, section 331 of the Code does not in itself specify the tax treatment of a liquidation, but instead characterizes the transaction as an exchange. Thus, section 1231 must be confined to the problem of capital gains and losses because that section by its own language pertains specifically to that problem, whereas section 331 is not similarly restricted.

Therefore, property received by a corporation in exchange for the stock of a corporation which is being completely liquidated is treated as property received in an exchange for purposes of section 337 of the Code.