Rev. Rul. 65-257

Advice has been requested whether, under the circumstances described below, all of the assets of a corporation are distributed in complete liquidation for purposes of section 337 of the Internal Revenue Code of 1954.

Shareholders owning more than 98 percent of the stock of a corporation adopted a plan of complete liquidation on July 1, 1963. The plan provided that the board of directors and officers were empowered to take all steps necessary to effect the complete liquidation of the corporation within 1 year of the adoption of the plan. Pursuant to the plan, the corporation sold all of its assets. After paying its liabilities, the corporation prepared to distribute 10 x dollars for each outstanding share of its stock.

However, some shareholders who owned less than 2 percent of the outstanding stock of the corporation objected to the sale of assets and elected to have their shares appraised in accordance with State law. On June 1, 1964, a report of an appraiser was filed, concluding that the dissenting shareholders were entitled to 15 x dollars per share rather than the 10 x dollars per share received by the nondissenting shareholders.

Under State law, the appraiser's report must be reviewed by a State court, which has the power to ratify, increase, or lower the valuation of the appraiser. A final determination of the value of the corporation's stock by a court of competent jurisdiction could not be obtained by June 30, 1964, the termination date of the 12-month period within which complete distribution by the corporation is required by section 337 of the Code. Efforts were made to settle the claims of the dissenting shareholders; however, the dissenting shareholders would not accept any offer of settlement.

The plan of complete liquidation approved by the shareholders contained no specific provision for payments to dissenting shareholders. In accordance with the general authority to effect the liquidation, the officers arranged for the corporation to divest itself of cash equal to the appraised value of the stock owned by the dissenting shareholders, plus statutory interest due thereon, by means of a complete transfer of such cash to an independent party by June 30, 1964. The independent party will act as an escrowee of the cash. Under the escrow agreement, the escrowee will pay the dissenting shareholders that amount finally determined by a court of competent jurisdiction. Any remaining funds will be distributed pro rata to the nondissenting shareholders. In the event of a deficiency in the escrow funds resulting from the payment as required by a State court, the principal nondissenting shareholders will pay the necessary additional amount.

Under no circumstances will any part of the funds deposited in escrow be returned to the corporation, nor will the corporation repay the principal nondissenting shareholders for any deficiency in the escrow that may occur.

Section 337(a) of the Code states the general rule that, if a corporation adopts a plan of complete liquidation on or after June 22, 1954, and within a 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation are distributed in complete liquidation, less assets retained to meet claims, 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.

Section 1.337-2(b) of the Income Tax Regulations provides, in part, that the nonrecognition provisions of section 337 of the Code shall not be applicable unless all of the corporate assets (other than those retained to meet claims of creditors) are distributed within 12-months after the date of the adoption of the plan of complete liquidation. Further, an amount merely set aside by the corporation to meet the claims of shareholders with respect to their stock will not satisfy the distribution requirement.

Although the plan of liquidation adopted by the shareholders contained no explicit provisions regarding transfers of cash in escrow to meet the claims of dissenting shareholders, it did provide that the board of directors and officers were empowered to take all steps necessary to effect the complete liquidation of the corporation within 1 year of the adoption of the plan. The escrow arrangement was an appropriate step necessary to effect the complete liquidation of the corporation pursuant to the plan approved by the shareholders, there being no provision preventing such action either in the plan or under State law. The transfer to the escrowee pursuant to the plan of complete liquidation approved by the shareholders accordingly will be considered a transfer to an escrowee selected by the shareholders. Compare Revenue Ruling 63-245, C.B. 1963-2, 144; Acampo Winery & Distilleries, Inc. v. Commissioner , 7 T.C. 629, at 635 and 636 (1946), acquiescence, C.B. 1949-1, 1, nonacquiescence on another issue, C.B. 1961-2, 6.

Accordingly, under the foregoing circumstances the transfer of cash to an independent escrowee was a distribution within the 12-month period described in section 337 of the Code and the corporation has distributed all of its assets within such period.