Rev. Rul. 57-140

Advice has been requested as to the effects for, Federal income tax purposes, of a sale by a corporation of a part of its assets and business at a time when liquidation was not contemplated, followed by the complete liquidation of the corporation pursuant to the decision reached some time after such sale, under the circumstances described below.

Prior to September 1954, M , a corporation, was engaged in operating two businesses as separate divisions. It also had a financial division not directly attributable to either of the two operating divisions. Its capital stock was widely held.

In November 1954, for certain sufficient business purposes, M sold one of its operating businesses, namely, B , to N , an unrelated corporation, at a price which resulted in a substantial loss. The consideration received was cash and debenture bonds of N . At the time of this sale. M's directors did not seek the approval of their stockholders, since the corporation did not contemplate selling its remaining assets and business, nor was there any plan to efect a complete liquidation. However, sometime after the 1954 sale, M considered for a time a plan of partial liquidation pursuant to which the proceeds of the 1954 sale would have been distributed to M's stockholders, but this plan was eventually abandoned. In connection with the contract of sale, the agreement provided that the remaining assets of the corporation and its business were not to be terminated.

During 1955, the officers and directors of M explored the possibilities of acquiring additional operating businesses for M , but their efforts were unsatisfactory and they reached the conclusion that the best plan would be to dispose of the remaining assets and business and liquidate the corporation completely. However, because of the first contract, it was necessary for the corporation to enter into special arrangements with the purchaser in order to complete the second sale.

Relative to the bona fides of the transaction during the period between the first and second sale showing that the two sales were not connected, the following factors were in evidence:

(a) Extensive plans for the improvement of the remaining business were made.

(b) Sales negotiations were conducted, directed to the acquisition and mergers of other business, all of which failed.

(c) One small business was purchased.

(d) The corporation continued to pay its regular dividend.

(e) The corporation undertook the study of a pension plan.

(f) The purchasing corporation in the summer of 1955 made a study in connection with the construction of a possible plant, similar to M corporation. (No such study would have been made had the purchasing corporation been certain that it was able to acquire the plant of the instant corporation.)

(g) The principal stockholder of the selling corporation had no intention of retiring from business activity.

On December 5, 1955, the directors adopted a resolution to effect the complete liquidation of M . The following day they adopted a resolution to authorize the sale of the remaining operating division, namely C , and the N debentures, and on December 8 they entered into a conditional agreement to sell to O , an unrelated corporation, the operating division C and the N debentures for a cash consideration that would result in a substantial gain to M . The directors' resolutions and the conditional agreement were subject to the approval of M's stockholders. It was also decided to dispose of the assets of the financial division and to distribute the proceeds to M's stockholders under the plan of complete liquidation.

At a special meeting of M's stockholders on April 3, 1956, the directors' resolutions to effect a complete liquidation of M and to sell the operating division C and the N debentures to O were approved. The sale was consummated on April 16, 1956.

Under the plan of complete liquidation, M intends to distribute all of its assets, other than those required to meet claims, to its stockholders within the 12-month period beginning on the date of adoption of the plan. M's Capital stock is traded on public stock exchanges and it has several thousand stockholders; therefore, it may not be possible to locate all of them and complete the liquidation within the 12-month period. If this proves true, M will transfer, before the expiration of the 12-month period, the amounts distributable to any unlocated stockholders to a state official, trustee, or other person authorized by law to receive distributions for the benefit of such stockholders.

In view of the facts presented, indicating that there was no intention, plan, or decision to liquidate M at the time of the loss sale in 1954, the Internal Revenue Service holds as follows:

(1) For purposes of section 337 of the Internal Revenue Code of 1954, the date of adoption of the plan of complete liquidation of M is the date on which its stockholders approved the resolution completely to liquidate the corporation, namely April 3, 1956.

(2) If M distributes all of its assets, other than those necessarily retained to meet claims, in complete liquidation within 12 months from the date of adoption of the plan of complete liquidation, within the meaning of section 337, no gain or loss will be recognized to M from the sale of its property to O pursuant to the agreement of December 8, 1955.

(3) If there are stockholders who cannot be located within the 12-month period and M within that period transfers the amounts distributable to such stockholders in redemption of their stock to a state official, trustee, or other person authorized by law to receive distributions for the benefit of such stockholders, such transfer will be considered a distribution in complete liquidation.