Rev. Rul. 56-212

Advice has been requested with respect to the tax consequences of a proposed liquidation of M corporation under the circumstances set forth below.

M corporation is a personal holding company as defined in section 542 of the Internal Revenue Code of 1954. Its balance sheet reflects assets having a book value of 9,000 x dollars, accrued liabilities amounting to 3 x dollars, and capital stock and surplus of 8,997 x dollars. The assets include investments in stock of X and Y corporations and other marketable securities amounting to 6,000 x dollars, 200 x dollars and 2,000 x dollars, respectively. The investments in X and Y corporations are substantially in excess of 80 percent of the outstanding stock of each of the said corporations.

The M corporation has only common stock outstanding, of which 19 percent is held by B , an individual, and the remaining 81 percent is held by R corporation.

Within recent years B , the minority stockholder, determined, because of age and poor health, to withdraw from the active pursuit of business. As an essential part of his retirement program, he decided to dispose of his stock holdings in M corporation. The R corporation also desired to acquire the investment assets of M corporation. In order to obtain the desired results, R corporation and B agreed on a program of liquidating the M corporation. The program contemplates the complete liquidation of the said corporation within some one calendar month of 1955. Pursuant to the adopted plan, 19 percent of the assets of M corporation will be distributed to B and the remaining 81 percent will be distributed to R corporation.

It is the present intention of the parties owning the stock of R corporation to continue the corporate existence of that corporation for an indefinite period as a family investment corporation and to utilize it from time to time as an appropriate corporate vehicle into which to liquidate various other corporations owned in whole or in part by the same interests.

Sections 332 and 333 of the Internal Revenue Code of 1954, which cover the primary issues involved in the above-described transactions, provide, in part, as follows:

SEC. 382. COMPLETE LIQUIDATIONS OF SUBSIDIARIES.

(a) GENERAL RULE.-No gain or loss shall be recognized on the receipt by a corporation of property distributed in complete liquidation of another corporation.

(b) LIQUIDATIONS TO WHICH SECTION APPLIES.-For purposes of subsection (a), a distribution shall be considered to be in complete liquidation only if-

(1) the corporation receiving such property was, on the date of the adoption of the plan of liquidation, and has continued to be at all times until the receipt of the property, the owner of stock (in such other corporation) possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and the owner of at least 80 percent of the total number of shares of all other classes of stock (except nonvoting stock which is limited and preferred as to dividends); and * * *

(2) the distribution is by such other corporation in complete cancellation or redemption of all its stock, and the transfer of all the property occurs within the taxable year; in such case the adoption by the shareholders of the resolution under which is authorized the distribution of all the assets of such corporation in complete cancellation or redemption of all its stock shall be considered an adoption of a plan of liquidation, even though no time for the completion of the transfer of the property is specified in such resolution; * * *.

SEC. 333. ELECTION AS TO RECOGNITION OF GAIN IN CERTAIN LIQUIDATIONS.

(a) GENERAL RULE.-In the case of property distributed in complete liquidation of a domestic corporation (other than a collapsible corporation to which section 341(a) applies), if-

(1) the liquidation is made in pursuance of a plan of liquidation adopted on or after June 22, 1954, and

(2) the distribution is in complete cancellation or redemption of all the stock, and the transfer of all the property under the liquidation occurs within some one calendar month, then in the case of each qualified electing shareholder (as defined in subsection (c) gain on the shares owned by him at the time of the adoption of the plan of liquidation shall be recognized only to the extent provided in subsections (e) and (f).

(b) EXCLUDED CORPORATION.-For purposes of this section, the term `excluded corporation' means a corporation which at any time between January 1, 1954, and the date of the adoption of the plan of liquidation, both dates inclusive was the owner of stock possessing 50 percent or more of the total combined voting power of all classes of stock entitled to vote on the adoption of such plan.

*

(e) NONCORPORATE SHAREHOLDERS.-In the case of a qualified electing shareholder other than a corporation-

(1) there shall be recognized, and treated as a dividend, so much of the gain as is not in excess of his ratable share of the earnings and profits of the corporation accumulated after February 28, 1913, such earnings and profits to be determined as of the close of the month in which the transfer in liquidation occurred under subsection (a)(2), but without diminution by reason of distributions made during such month; but by including in the computation thereof all amounts accrued up to the date on which the transfer of all the property under the liquidation is completed; and

(2) there shall be recognized, and treated as short-term or long-term capital gain, as the case may be, so much of the remainder of the gain as is not in excess of the amount by which the value of that portion of the assets received by him which consists of money, or of stock or securities acquired by the corporation after December 31, 1953, exceeds his ratable share of such earnings and profits.

Based upon the foregoing facts and circumstances, it is held as follows:

(1) The minority stockholder, B , will be entitled to the benefits of section 333 of the Code, provided the requirements of that section are met. R corporation, being an excluded corporation within the meaning of subsection (b) of section 333 of the Code, will not be entitled to the benefits of that section. As provided by section 334(c) of the Code, the basis of the assets acquired by B will be the same as the cost or other basis of the stock of M corporation owned by him, decreased in the amount of any money received, and increased in the amount of any gain recognized.

(2) The distribution by M corporation of 81 percent of its assets to R corporation, in complete cancellation or redemption of the stock of M corporation held by R corporation, will result in no gain or loss to R corporation upon the receipt of the assets from M corporation under section 332 of the Code, provided all the provisions of that section are met. The basis of such assets in the hands of R corporation will be the same as it would be in the hands of the M corporation, under section 334(b)(1) of the Code.

(3) No gain or loss will be recognized to M corporation upon the complete liquidation thereof within some one calendar month of 1955, under section 336 of the Code.

(4) The earnings and profits of M corporation at the time of the liquidation, which are properly applicable to the assets distributed to R corporation, will become earnings and profits of the latter corporation, under section 381 of the Code.