Rev. Rul. 71-250

Advice has been requested whether the distribution described below qualifies as in partial liquidation within the meaning of section 346(a)(2) of the Internal Revenue Code of 1954.

A corporation was engaged in the ownership and operation of three television stations. In July 1970, it sold one of its stations for 6,000x dollars. After reduction for expenses and for taxes of the sale, the corporation realized net proceeds of 4,500x dollars which were transferred to a special account at a bank acting as a custodian, as a temporary measure for the purpose of preserving the funds until a decision could be made as to the utilization thereof. The bank then invested the funds in stocks of publicly traded corporations and United States Treasury bills. The bank made no further changes in the investment account until it sold each of the stocks at a gain and redeemed the United States Treasury bills in December 1970 at a total profit of 200x dollars which was included in gross income by the corporation.

Subsequent to the above sale of one of its television stations, the corporation explored the possibility of purchasing other stations with the proceeds but had to abandon any such reinvestment when no satisfactory arrangement could be consummated.

Therefore, in December 1970, the corporation adopted a plan of partial liquidation pursuant to which it distributed in February 1971 all the funds from the investment account (including the appreciation from its investments), or 4,700x dollars, pro rata to its shareholders in redemption of a part of the corporation's outstanding stock.

Section 346(a)(2) of the Internal Revenue Code of 1954 provides that a distribution will be treated as in partial liquidation of a corporation if it is not essentially equivalent to a dividend, is in redemption of a part of the stock of the corporation pursuant to a plan, and occurs within the taxable year in which the plan is adopted or within the succeeding taxable year. Section 1.346-1(a)(2) of the Income Tax Regulations provides that a distribution which will qualify as a partial liquidation under section 346(a)(2) of the Code is a distribution resulting from a genuine contraction of the corporate business while a distribution of funds attributable to a reserve for expansion program which has been abandoned does not qualify as a partial liquidation within the meaning of section 346(a)(2) of the Code.

The sale by the corporation of one of its television stations and the distribution of all the net proceeds of the sale was a genuine contraction of the corporation.

While the corporation committed the net proceeds of the sale to an investment account with its bank, the distribution of the funds in this account is not attributable to an abandoned reserve for expansion under section 1.346-1(a)(2) of the regulations because that section is not intended to apply to the investment of the net proceeds in publicly traded stock or similar investments where such investment is a temporary measure solely to preserve the funds until a decision is reached as to its utilization.

The investment of the proceeds as a temporary measure for the purpose of preserving the funds does not constitute a dedication of the funds to the remaining business enterprise or an expansion of an existing business. Revenue Ruling 58-565, C.B. 1958-2, 140, which holds that the requirements of section 346 of the Code are not satisfied, is distinguishable since in that situation the proceeds of the sale were used to pay existing indebtedness of the remaining business. Likewise, Revenue Ruling 67-299, C.B. 1967-2, 138 is distinguishable since in that Revenue Ruling the sales proceeds were used to remodel property in order to expand the remaining business.

The profit of 200x dollars is not, however, attributable to the genuine contraction of the corporation's business activities and will thus not qualify as a distribution in partial liquidation under section 346(a)(2) of the Code. Accordingly, the distribution of the proceeds of 4500x dollars attributable to the contraction of the corporate business qualifies as a distribution in partial liquidation under section 346(a)(2) of the Code. The distribution of the 200x dollars is a distribution of property under section 301 of the Code.