Rev. Rul. 74-441

Advice has been requested whether, under the circumstances described below, the 80 percent stock ownership requirement of section 334(b)(2)(B) of the Internal Revenue Code of 1954 has been satisfied if stock of the distributing corporation possessing at least 80 percent of the total combined voting power is owned, in the aggregate, by the members of an affiliated group of corporations.

P, a domestic corporation, owned 100 percent of domestic corporations R, S, and T and filed a consolidated Federal income tax return for the affiliated group consisting of P, R, S, and T for the taxable year 1972.

During such year, the members of the affiliated group purchased for cash all of the outstanding stock of domestic corporation X. However, following the acquisition no single member of the affiliated group owned 80 percent or more of X's stock. During the same year the assets of X were distributed to the members of the affiliated group in a liquidation to which section 332 of the Code applied.

Section 334(b)(2) of the Code provides a special rule for determining the basis of property received by a corporation in certain distributions in complete liquidation of another corporation within the meaning of section 332(b). Section 334(b)(2) provides, generally, that the basis of the property received shall be the same as the distributee corporation's basis of its stock in the distributing corporation.

One of the requirements for the application of the special basis rule of section 334(b)(2) of the Code is that the stock of the distributing corporation possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock (except non-voting stock which is limited and preferred as to dividends) must have been acquired by the distributee corporation by "purchase," section 334(b)(2)(B), during a specified 12 month period.

Section 332(a) of the Code provides, in general, that no gain or loss shall be recognized on the receipt by a corporation of property distributed in complete liquidation of another corporation. One of the required conditions set forth in section 332(b)(1) for this nonrecognition treatment is that the corporation receiving the property be the owner of stock in the distributing corporation possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and the owner of at least 80 percent of the total number of shares of all other classes of stock, (except nonvoting stock which is limited and preferred as to dividends).

Section 1.1502-34 of the Income Tax Regulations provides, in part, and in effect, that, for purposes of sections 1.1502-1 through 1.1502-80, in determining the stock ownership of a member of an affiliated group in the distributing corporation for purposes of determining the application of section 332(b)(1) of the Code, in a consolidated return year, there shall be included stock owned by all other members of the group in the distributing corporation. However, section 1.1502-31(b)(2)(i) provides that the basis of property acquired in a liquidation to which section 332 applies shall be determined as if separate returns were filed.

The question thus presented is whether the latter rule precludes the application of the special basis rule of section 334(b)(2) of the Code in the instant case, since more of the members of the affiliated group individually own stock in X possessing at least 80 percent of the total combined voting power.

The purpose of section 334(b)(2) of the Code is to provide a basis rule for property received in liquidating distributions qualifying under section 332 that meet additional conditions relating to when and how the required 80 percent stock ownership has been acquired, the plan of liquidation adopted, and the distribution undertaken. This is suggested by the use of the same language in section 334(b)(2) in defining the stock ownership requirement as that used in section 332(b)(1). Moreover, since section 334(b)(2) applies only to distributions in complete liquidation within the meaning of section 332(b), it would be superfluous for section 334(b)(2) to impose an 80 percent stock ownership separate and distinct from that required under section 332(b)(1).

The purpose of section 1.1502-31(b)(2)(i) of the regulations is to allow for the application of the basis rules of either section 334(b)(1) or (2) of the Code without regard to a distributee corporation's status as a member of an affiliated group.

Accordingly, P, R, S, and T will each satisfy the 80 percent stock ownership requirement of section 334(b)(2)(B) of the Code by virtue of the aggregation rule in section 1.1502-34 of the regulations.