Rev. Rul. 56-448

Advice has been requested whether, in determining the amount of a net operating loss for a taxable year beginning in 1954, the net operating loss carryback, and the net operating loss deduction for 1952, adjustment is required to be made for a gain from the sale of corporate assets which is not recognized under section 337 of the Internal Revenue Code of 1954.

On June 30, 1954, taxpayer corporation, pursuant to a plan of complete liquidation, sold its physical assets at a gain of 10 x dollars. The assets were all of the type to which section 337 of the 1954 Code applies. For the period from January 1, 1954, to September 30, 1954, the corporation sustained a net operating loss of 8 x dollars, which amount was carried back to the taxable year 1952 and a tentative allowance made for that year.

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 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 within the 12-month period of such property (with certain exclusions not here applicable).

Section 172(c) of the Code defines a net operating loss for any taxable year ending after December 31, 1953 (except as otherwise provided in section 172(f) with respect to taxable years beginning in 1953 and ending in 1954, as the excess of the deductions allowed by Chapter 1 of the Code over the gross income. Such excess, in the case of a corporation, shall be computed with modifications specified in section 172(d), relating to net operating loss deductions, certain partially tax-exempt interest, Western Hemisphere trade corporations, and deductions for certain dividends received. Section 172(b)(2) of the Code provides that, except for taxable years beginning in 1953 and ending in 1954, the entire amount of the net operating loss shall be carried back to the earliest of the seven taxable years to which such loss may be carried. Section 172(e) of the Code provides that, in determining the amount of any net operating loss carryback or carryover to any taxable year, the necessary computations involving any other taxable year shall be made under the law applicable to such other taxable year.

In the instant case, the gain from the sale during the 12-month liquidation period by the corporation of its physical assets, none of which were excluded by section 337 of the Code from the definition of the term `property,' is not recognized for Federal income tax purposes. The effect of section 337 is to eliminate the necessity of determining whether a corporation in process of complete liquidation made a sale of assets or whether the shareholders receiving the assets made the sale. If a corporation adopts a plan of liquidation and liquidates within 12 months thereafter, sales of assets not specifically excluded by section 337 during such 12-month period result in no tax at the corporate level. See Senate Report No. 1622 on H.R. 8300, 83d Cong., Second Session, pages 48 and 49. Since section 172(c) of the Code relates to taxable years ending after December 31, 1953 (except as otherwise provided in section 172(f)), and the taxable year in the instant case began on January 1, 1954 and ended on September 30, 1954, the net operating loss for such taxable year is the excess of the deductions allowed by Chapter 1 over the gross income. None of the modifications specified in section 172(d) of the Code are applicable in this case. Consequently, the net operating loss is not adjusted for the unrecognized gain from the sale of corporate assets, and the entire amount of the net operating loss is carried back to the taxable year 1952.

In converting the net operating loss carryback from 1954 to a net operating loss deduction in 1952, section 122(c) of the Internal Revenue Code of 1939, applicable to the taxable year 1952, provides that the net operating loss deduction shall be the aggregate of the carrybacks and carryovers to the taxable year reduced by the amount, if any, by which the net income, computed with the exceptions provided in section 122(d)(1), (2), (3) and (4), exceeds, in the case of a corporation, the normal tax net income (computed without such deduction and without certain specified credits). The adjustments specified in section 122(d)(1), (2), (3), and (4) all pertain to items of the year to which the loss is carried, not to the loss year itself.

Accordingly, it is held that where a corporation sustained a net operating loss for a taxable year beginning in 1954 during which it sold corporate assets, pursuant to a plan of complete liquidation, at a gain which is not recognized for Federal income tax purposes under the provisions of section 337 of the 1954 Code, the amount of the net operating loss, and the net operating loss carryback, and the deduction allowable for a preceding taxable year are to be computed without adjustment for the unrecognized gain from the sale of such assets.