Rev. Rul. 73-515

Advice has been requested as to the application of the investment credit recapture provisions set forth in section 47(a) of the Internal Revenue Code of 1954 under the circumstances described below.

M, the taxpayer, was a domestic corporation wholly owned by B, an individual. M owned apartment buildings and hotels, and, in connection therewith, owned various items of section 38 property which had, in 1968, not been in service long enough to preclude recapture under section 47(a) of the Code. In 1968, M adopted a plan of complete liquidation and distributed all of its assets to B in complete cancellation and redemption of all of its shares in a transaction qualifying under section 333(a).

B continued to use the assets distributed in the same business in which M had been engaged, namely, the rental of apartment and hotel units.

Section 47(a) of the Code provides for the recapture of investment credit as a result of certain dispositions of section 38 property. Section 47(b) provides for the nonapplication of the recapture provisions in certain cases. Insofar as is pertinent here, section 47(b) provides that property shall not be treated as ceasing to be section 38 property with respect to the taxpayer by reason of a mere change in the form of conducting the trade or business so long as the property is retained in such trade or business as section 38 property and the taxpayer retains a substantial interest in such trade or business.

Section 1.47-3(f)(1)(ii) of the Income Tax Regulations sets forth certain conditions that must be satisfied in order that a mere change in the form of conducting the trade or business will not result in the recapture of the investment credit. Section 1.47-3(f)(1)(ii)(d) of the regulations provides that the basis of the section 38 property in the hands of the transferee must be determined in whole or in part by reference to the basis of such property in the hands of the transferor for the transaction to be treated as though no disposition took place.

Under section 334(c) of the Code the basis of assets (other than money) acquired by stockholders in a liquidation upon which the amount of gain recognized was limited under section 333 is the basis of the shares of stock redeemed or cancelled, decreased in the amount of money received and increased in the amount of gain recognized and the amount of unsecured liabilities assumed by the stockholders. See section 1.334-2 of the regulations.

Accordingly, since the basis of section 38 property in B's hands is determined without regard to the basis of such property in M's hands, the transaction does not meet the condition set forth in section 1.47-3(f)(1)(ii)(d) of the regulations and, therefore, is not a mere change in form of conducting a trade or business within the meaning of section 47(b) of the Code. The normal recapture of investment credit provisions of section 47(a) are to be applied to the return of M for the year of its liquidation.