Rev. Rul. 65-258

In a liquidation under section 332 of the Internal Revenue Code of 1954, in which the basis of assets is determined under section 334(b)(2) of the Code as compared to section 334(b)(1) of the Code, the bad debt reserve does not carry over to the acquiring corporation.

The method of treating bad debts for Federal income tax purposes is within the term "method of accounting" as used in section 381(c)(4) of the Code. Under section 1.381(c)(4) - 1(a)(1)(ii) of the Income Tax Regulations the bad debt reserve of the acquired corporation is carried over by the acquiring corporation in certain situations.

However, section 381(a) of the Code states that the carryover provisions of section 381 of the Code are not applicable to a section 332 liquidation in which the basis of the assets distributed is determined under section 334(b)(2) of the Code. Therefore, since the reserve for bad debts does not carry over under section 381 of the Code, the reserve must be returned to the income of the liquidating corporation, to the extent that a tax benefit has been derived, in the taxable year in which there is no longer the necessity for such reserve, because all accounts receivable have been transferred to the acquiring corporation. See Revenue Ruling 57-482, C.B. 1957-2, 49, relating to a liquidation under section 337 of the Code.