Rev. Rul. 61-214

Advice has been requested whether, in connection with a sale of corporate assets, certain recoveries of items which previously had been deducted for Federal income tax purposes are to be treated as proceeds of a nontaxable sale under the provisions of section 337(a) of the Internal Revenue Code of 1954.

An office building corporation, availing itself of the benefits of section 337 of the Code, adopted a plan of complete liquidation and within the 12-month period sold its entire assets to a single buyer. Included in the sale were a stock-pile of coal, plumbing supplies, and small tools. The costs of such items had been deducted in full in taxable years prior to the year of sale.

Section 337(a) of the Code, pertaining to gain or loss on sales or exchanges in connection with certain liquidations, sets forth the general rule 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 are distributed in complete liquidation, less assets retained to meet claims, 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.

The provisions of section 337(a) apply only to gain or loss from the `sale or exchange' of property. In the instant case, part of the proceeds from the sale is, in reality, a recovery of amounts previously deducted for Federal income tax purposes. Thus, that part is not to be treated as gain from the sale of assets, but, rather, is subject to the rule that a recovery of an amount previously deducted constitutes ordinary income to the extent of a prior tax benefit. See Rev. Rul. 60-49, C.B. 1960-1, 148; Central Building and Loan Association v. Commissioner , 34 T.C. 447 (1960); First State Bank of Stratford v. Commissioner , 168 Fed.(2d) 1004 (1948), certiorari denied, 335 U.S. 867 (1948).

In view of the foregoing, it is held that in the instant case the portion of the proceeds representing a recovery of the amounts of such items which previously had been deducted for Federal income tax purposes is to be treated as ordinary income to the corporation under section 61 of the Code and not as nonrecognized gain under the provisions of section 337(a) of the Code.