Rev. Rul. 77-321

Advice has been requested concerning the Federal income tax treatment of the transaction described below under section 333 of the Internal Revenue Code of 1954.

The sole shareholder of a corporation, an individual, wished to dissolve the corporation and have the assets of the corporation transferred to a partnership in exchange for an interest in the partnership. The partnership would thereafter conduct the business formerly conducted by the corporation. The assets of the corporation consisted, in part, of money and of stock and securities acquired by the corporation after December 31, 1953. The corporation had no current or accumulated earnings and profits.

Section 333 of the Code provides, in part, that upon the complete liquidation within one calendar month of a domestic corporation with no accumulated earnings and profits, the gain, if any, realized by a qualified electing noncorporate shareholder on the distribution of property in complete cancellation or redemption of the shareholder's stock will be recognized only to the extent that the shareholder receives money, or stock or securities acquired by the corporation after December 31, 1953.

Section 334(c) of the Code provides that property distributed in complete liquidation under section 333, and in cancellation or redemption of the stock of a qualified electing shareholder, shall have a basis the same as the basis of the stock cancelled or redeemed in the liquidation, decreased in the amount of any money received by the shareholder, and increased in the amount of gain recognized to the shareholder.

Section 721 of the Code provides that no gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership.

Section 722 of the Code provides that the basis of an interest in a partnership acquired by a contribution of property, including money, to the partnership shall be the amount of such money and the adjusted basis of such property to the contributing partner at the time of the contribution.

Section 723 of the Code provides that the basis of property contributed to a partnership by a partner shall be the adjusted basis of such property to the contributing partner at the time of the contribution.

If the corporation had been dissolved first and its assets distributed in complete liquidation to the shareholder who thereafter contributed the assets to a partnership in exchange for an interest in the partnership, the shareholder could have elected to be governed by the provisions of section 333 of the Code, but under section 333(e)(2) gain would have been recognized to the shareholder to the extent of the money and the fair market value of the post-1953 stock and securities distributed.

However, as a means of carrying out the plan to distribute all of its assets to its sole shareholder in complete liquidation, the corporation, at the direction of the shareholder, transferred all of its assets directly to the partnership in exchange for a partnership interest. The corporation immediately distributed the partnership interest, its sole asset, to the shareholder in complete liquidation and the shareholder elected to be governed by the provisions of section 333 of the Code on the theory that no gain would be recognized to the shareholder because the corporation had no earnings and profits and it did not distribute any money or post-1953 stock or securities.

The corporation was in the process of liquidating and distributing its assets when it acquired the partnership interest. Its holding of the interest was, therefore, only a transitory step and did not represent any permanent investment or intent to participate permanently in the partnership. Moreover, the transfer of corporate assets to the partnership served no corporate purpose other than avoiding shareholder taxes upon distribution of its assets. Therefore, its transfer of assets to the partnership and its holding of an interest in the partnership should be treated as mere transitory steps taken in an effort to avoid the tax consequences under section 333(e)(2) of the Code of the distribution of the money and the securities. See Rev. Rul. 60-331, 1960-2 C.B. 189; and Rev. Rul. 70-140, 1970-1 C.B. 73.

Accordingly, the contribution by the corporation of its assets in exchange for the partnership interest will be ignored. The corporation will be deemed to have distributed those assets to the shareholder in complete liquidation of the corporation and in complete cancellation and redemption of the shareholder's stock, and the shareholder will be deemed to have contributed the assets to the partnership in exchange for a partnership interest.

The shareholder will recognize gain under section 333(e)(2) of the Code to the extent of the money and the fair market value of the post-1953 stock and securities constructively distributed to the shareholder, and the shareholder's basis in the constructively distributed assets will be adjusted in the manner prescribed in section 334(c). No gain or loss will be recognized to the partnership or the shareholder under section 721 upon the constructive contribution by the shareholder of the assets to the partnership in exchange for an interest in the partnership. The basis of the shareholder's partnership interest to the shareholder under section 722, as well as the basis to the partnership of the assets received, under section 723, will be the amount of money contributed and the basis of the assets, as adjusted under section 334(c), to the shareholder at the time of the constructive contribution.