Rev. Rul. 73-264

Advice has been requested concerning the last two sentences of Rev. Rul. 56-387, 1956-2 C.B. 189.

In Rev. Rul. 56-387, an equity receivership proceeding was instituted against a corporation in a United States District Court in 1930, and an involuntary petition under section 77B of the Bankruptcy Act (since superseded by Chapter X) was filed in the same court in 1935. With the approval of the court (and subsequent to 1954), all of the fixed assets of the corporation were sold for cash; all other assets were reduced to cash; certain expenses were paid by the trustee; and the remaining cash was distributed to certain creditors of the corporation according to their priority as determined by the court. The corporation was dissolved within twelve months after the sale of assets was approved by the court. Not all creditors were paid and the shareholders received nothing.

Rev. Rul. 56-387 states that since all of the assets will be distributed to creditors, there will be no distribution of assets to the shareholders in redemption of their stock pursuant to a plan of complete liquidation as required by section 1.337-2(b) of the Income Tax Regulations. Accordingly, Rev. Rul. 56-387 holds that section 337 of the Internal Revenue Code of 1954, relating to nonrecognition of gain or loss to a corporation upon a sale of its assets followed by a complete liquidation within a twelve-month period, will not be applicable to the gain or loss on the sale.

The last two sentences of Rev. Rul. 56-387 state an additional reason for the nonapplication of section 337 of the Code. They read as follows:

* * * Congress intended through section 337 of the 1954 Code to eliminate the double tax on gains realized from sales of corporate assets during a period of liquidation, but did not intend to eliminate entirely the tax on such gains. Where the shareholders are to receive nothing in the liquidation in payment for their stock, there is no possibility of a tax to both the corporation and the shareholders on the gains resulting from the sale.

The implication of these sentences is that section 337 of the Code is not applicable to sales made by a corporation in the process of liquidation if there are liquidating distributions but such distributions do not result in a tax to the shareholders. This rationale is erroneous.

In Commissioner v. Court Holding Co., 324 U.S. 331 (1945), 1945 C.B. 58, the Supreme Court of the United States held that a sale of property by the shareholders of a corporation after receipt of the property as a liquidating distribution was taxable to the corporation when the corporation had in fact conducted all the negotiations and the terms of the sale had been agreed upon prior to the distribution of the property. However, in its decision in The United States v. Cumberland Public Service Co., 338 U.S. 451 (1950), 1950-1 C.B. 18, the Court held that a sale of assets by the shareholders after distribution of the assets by the corporation pursuant to a liquidation was not taxable to the corporation. This latter decision was based on the finding of fact by the trial court to the effect that the corporation had rejected an offer to sell the property and the negotiations had been carried on by the shareholders after receipt of the property in liquidation.

Section 337 of the Code was enacted by Congress to provide a result that would obviate the necessity of determining whether a corporation in the process of complete liquidation made a sale of its assets or whether the shareholders made the sale after receipt of the assets. See S. Rep. No. 1622, 83rd Cong., 2d Sess. 48, 49 (1954). Neither section 337 of the Code nor its legislative history indicates that a liquidating distribution must result in a tax to the shareholders in order for section 337 of the Code to apply. For example, if the liquidating distribution to a shareholder is less than the basis of his stock, section 337 of the Code applies even though the distribution does not result in a tax to the shareholder.

Accordingly, Rev. Rul. 56-387 is modified to the extent that it implies that section 337 of the Code will apply only where the liquidating distribution results in a tax at the shareholder level.