Rev. Rul. 77-150

Advice has been requested concerning the applicability of section 337 of the Internal Revenue Code of 1954 to the situation described below.

On January 1, 1975, the shareholders of X, a domestic corporation, adopted a plan of complete liquidation as described in section 337 of the Code. In connection with this plan of liquidation, X sold its assets on February 1, 1975, to an unrelated third party and realized a loss upon the sale. In order to avail itself of the use of this loss, X intentionally waited until April 1, 1976, a period in excess of 12 months from the date of adoption of the plan of liquidation, before distributing all of the proceeds from the sale of its assets to its shareholders in liquidation.

Section 337(a) of the Code provides that if a corporation adopts a plan of complete liquidation on or after June 22, 1954, and, within the 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation, less assets retained to meet claims, are distributed in complete liquidation, then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property within such 12-month period.

Section 1.337-2(b) of the Income Tax Regulations provides, in part, that section 337 of the Code will not apply in any case in which all of the corporate assets (other than those retained to meet claims) are not distributed to the shareholders within 12 months after the date of the adoption of a resolution by the shareholders authorizing the distribution of all the corporate assets in redemption of all the corporate stock.

The legislative history concerning section 337 of the Code indicates that the section was designed to operate in a mechanical fashion so that uncertainty would be eliminated in liquidations thereunder. See S. Rep. No. 1622, 83rd Cong., 2d Sess. 48 (1954). The available judicial authorities reflect this Congressional intent and indicate that a corporation in liquidation status may intentionally avoid the application of section 337 by retaining assets in excess of those needed to meet claims beyond the 12 month period in section 337(a). In this regard, see the case of Milwaukee Sanitarium v. United States, 193 F. Supp. 299 (E.D. Wisc. 1961) wherein, prior to the trial of the case, the government stipulated that assets deliberately retained by the corporation beyond the 12 month period exceeded the amount required to meet all possible claims and the court viewed such stipulation as an admission by the government that a deliberate retention of assets beyond the 12 month period prevents the application of section 337 so long as the assets retained exceed the amount required to meet all claims. Also, see, Bird Management, Inc., 48 T.C. 586, 594 (1976) wherein the following statement is made: "It is true that petitioner might have delayed the distribution of its real estate or other assets past the June 26, 1962, deadline and thus have avoided the operation of section 337."

Accordingly, section 337 of the Code is not applicable under the facts described above because all of the assets of X (other than those retained to meet claims) were not distributed to the shareholders of X within 12 months after the date of the adoption of the resolution by the shareholders authorizing the liquidation of X. Consequently, the loss realized by X is recognized by X.