Rev. Rul. 73-551

Advice has been requested whether, under the circumstances described below, the provisions of section 337 of the Internal Revenue Code of 1954 apply to a sale by a corporation of "property", as defined in section 337(b), to one of its shareholders subsequent to the adoption by the corporation of a plan of complete liquidation.

X corporation had outstanding 100,000 shares of common stock of which 50,000 shares were owned by Y corporation. The remaining 50,000 shares were widely held by approximately 500 individual shareholders, none of whom owned any stock of Y.

Due to irreconcilable policy disagreements between the directors of Y and the individual shareholders of X, it was decided that X should be liquidated and that Y should acquire all of the X assets and thereafter conduct the business operations of X as a division of Y. It was recognized that it would not be feasible to make a pro rata liquidating distribution in kind of the X assets to each of the shareholders, including Y, followed thereafter by separate sales of distributed assets to Y by each of the approximately 500 individual shareholders. Therefore, the plan of complete liquidation adopted by the shareholders provided that X would sell all of its assets at their fair market value to Y in a transaction qualifying under the provisions of section 337 of the Code and thereafter distribute the proceeds of the sale to its shareholders in liquidation of X. The price at which the assets were sold was arrived at by arms-length bargaining.

Pursuant to the plan of complete liquidation, X sold all of its assets to Y for a fair market value consideration of 100x dollars. Within 12 months after the adoption of the plan of liquidation, X made a pro rata liquidating distribution of the 100x dollars to its shareholders, including 50x dollars to Y, in complete cancellation and redemption of their 100,000 shares of stock and X was dissolved.

Section 337 of the Code provides, in pertinent part, that, as a general rule, no gain or loss will be recognized to a corporation from the sale or exchange by it of property, as defined in section 337(b), within the 12-month period following the adoption by the corporation of a plan of complete liquidation, provided all of the assets of the corporation, less assets retained to meet claims, are distributed to the shareholders within such 12-month period.

A sale of property by a corporation to one of its shareholders pursuant to a plan of complete liquidation may be disregarded as a meaningless gesture under certain circumstances. For example, if in the instant case, Y were the sole shareholder of X, the transfer by Y of 100x dollars to X on the sale and the immediate distribution by X of the 100x dollars back to Y would be transitory and a meaningless gesture and the transaction would be treated as a distribution of the property in complete liquidation. Such a sale, however, will not be disregarded where, as in the instant case, the sale (1) is the result of arm's length bargaining between the purchasing shareholder and the corporation, and (2) is a bona fide sale. The existence of a bona fide sale in the instant transaction is evidenced by the business purpose of providing a solution to shareholder and corporate problems and by the fact that the plan of complete liquidation, including the sale of assets, is adopted by shareholders not participating in the purchase who own a substantial portion of shares entitled to vote.

Accordingly, section 337 of the Code applies to the sale by X of its assets to Y and, except as otherwise provided in the Code, no gain or loss will be recognized to X on the sale.