Rev. Rul. 58-95

Advice has been requested whether a distribution under a qualified employees' pension trust, terminated on the occasion of the liquidation of a subsidiary company, with resultant transfer of all its assets to the controlling corporation, where the employees of the subsidiary become employees of the controlling corporation, may be considered to be made on account of the employees' "separation from the service" of the employer within the intendment of section 402(a)(2) of the Internal Revenue Code of 1954.

In March 1956, the M corporation purchased all outstanding shares of the stock of O company. The O company continued to operate, as a wholly owned subsidiary of the M corporation, until July 1956, when, under a plan of complete liquidation theretofore adopted, all of the assets of the O company, exclusive of its franchise, were distributed to the M corporation, as its sole stockholder. The distribution of assets, subject to liabilities, resulted in the complete liquidation of the O company within the meaning of section 332(b) of the Code.

After the complete liquidation of the O company, the M corporation continued the same business at the place of business formerly used by the O company. The former employees of the O company were then taken over by the M corporation. The basis for the assets acquired by the M corporation was determined under the provisions of section 334(b)(2) of the Code, wherein it is provided, in part, that if property is received by a corporation in a distribution in complete liquidation of another corporation, within the meaning of section 332(b), and if the distribution is pursuant to a plan of liquidation adopted on or after June 22, 1954, and not more than two years after the date 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, was acquired by the distributee by purchase during a period of not more than 12 months, then the basis of the property in the hands of the distributee shall be the adjusted basis of the stock with respect to which the distribution was made.

Upon the liquidation of the O company, the employees' pension plan and trust, which it had established in 1943 and which have been held respectively to meet the requirements of section 401(a) of the Code and to be exempt under section 501(a), were terminated. A distribution, of the total amount due the employee participants under the trust, was made in one taxable year to each of the distributees.

Section 402(a)(1) of the Code provides, in part, that amounts actually distributed or made available under a qualified employees' trust shall be taxable in the year in which distributed or made available, under section 72 of the Code except that section 72(e)(3) shall not apply. Section 402(a)(2) provides that if the total distributions payable under a qualified trust, with respect to any employee, are paid to the distributee within one taxable year of the distributee on account of the employees' death or other separation from the service, or on account of the employees' death after separation from the service, the amount of such distribution, to the extent exceeding the amount contributed by the employee, shall be considered a gain from the sale or exchange of a capital asset held for more than six months.

The facts of the instant case closely parallel those in the case of Lester B. Martin et ux. v. Commissioner, 26 T. C. 100, acquiescence page 5. There the entire capital stock of the employer corporation was acquired by another corporation for cash in September, 1948, and the purchasing corporation operated the employer corporation as a subsidiary through March, 1949, with the employer corporation's pension plan remaining in effect during that period of operation. On April 1, 1949, however, the subsidiary employer corporation was liquidated and all of its assets were transferred to the parent along with all of its employees. The pension plan of the former employer was thereupon terminated and terminal distributions were made to its beneficiaries, which were held entitled to capital gain treatment under section 165(b) of the 1939 Code. The Tax Court, following its decision in Mary Miller et al. v. Commissioner, 22 T. C. 293, affirmed 226 Fed. (2d) 618, acquiescence page 5, held that the liquidation of the subsidiary itself resulted in a "separation from the service" of the liquidated corporation.

For the reasons stated in Rev. Rul. 58-94, page 194, it is the position of the Internal Revenue Service that the liquidation of a wholly-owned subsidiary corporation does not, in and of itself, effect a "separation from the service" of an employer within the meaning of section 402(a)(2) of the 1954 Code. The rationale of the Martin case is therefore not considered controlling for the purposes of section 402(a)(2). Nevertheless, it is considered that the same result might be reached on similar facts under section 402(a)(2) of the Code, provided the acquisition of stock of the liquidated corporation and the later liquidation may be regarded as an integrated transaction in substance involving the purchase of the assets of the former employer corporation. The rule is well established by court decisions that the acquisition of the assets of a corporation in a series of steps, involving an initial purchase of its stock and the later liquidation or merger of the acquired corporation into the acquiring corporation, may in substance constitute an acquisition of the assets for cash. See, for example, Commissioner v. Ashland Oil and Refining Co., 99 Fed. (2d) 588, certiorari denied, 306 U. S. 661; Kimbell-Diamond Milling Co. v. Commissioner, 14 T. C. 74, affirmed 187 Fed. (2d) 718, certiorari denied 342 U. S. 827. In such cases there is a real, as distinguished from a purely formal or technical, change in the ownership of the business, and the fact that the necessary series of steps includes a corporate liquidation or reorganization does not preclude the result that a "separation from the service" of the former employer corporation has occurred.

As indicated above, section 334(b)(2) of the Code allows a corporation which has acquired at least 80 percent of all classes of stock of another corporation, including voting stock, within a period of 12 months, to take as its basis for assets acquired within two years thereafter in a section 332(b) liquidation the adjusted basis of the stock with respect to which the distribution was made. Section 334(b)(2) represents a special statutory extension, for basis purposes, of the rule of the Ashland Oil and Refining Co. and The Kimbell-Diamond Milling Co. line of decisions since its effect is similarly to treat the acquisition as an acquisition of assets rather than of stock in the first instance. Where section 334(b)(2) is applicable, the Service will ordinarily view the acquisition as of assets rather than stock for the purposes of section 402(a)(2) as well, in the interest of convenience in administration.

Accordingly, it is held that a "separation from the service" of a corporate employer occurs, within the intendment of section 402(a)(2) of the Internal Revenue Code of 1954, when the termination of its qualified employees' pension trust is incident to the acquisition of all of its stock by another corporation for cash, in a transaction amounting in substance to a purchase of assets for cash, even though shortly thereafter its employees are taken over by the controlling corporation upon the transfer of the assets of the subsidiary to the controlling corporation under a plan of complete liquidation within the meaning of section 332(b) of the Code. Therefore, a distribution made in one taxable year of each distributee, of the total amount due such employees upon the termination of the trust, may be considered a gain from the sale or exchange of a capital asset held for more than six months, to the extent that it exceeds the amount contributed by the employee.