Rev. Rul. 59-412

Advice has been requested whether payments made by a parent corporation to minority shareholders of a subsidiary corporation, after a cancellation of stock and a distribution of assets of the subsidiary corporation, can be considered in payment for stock of the subsidiary corporation in computing the over-all basis of the assets received by the parent corporation within the meaning of section 334(b)(2) of the Internal Revenue Code of 1954.

M corporation contracted to purchase, at fair market value (45 x dollars per share), 99 percent of the shares of N corporation. Immediately after such purchase, N was merged into the parent corporation M in a liquidation to which section 332 of the Code applied. Under the merger agreement, all of the shares of N were cancelled and all of its assets were distributed to M corporation, subject to the interests of the minority shareholders. As to the minority interest of one percent, the agreement provided that, if all of the stock of N corporation was not acquired prior to the liquidation and merger, the parent corporation would be obligated to pay upon the surrender of the certificates, 45 x dollars per share for all shares not previously acquired. The minority interests were purchased subsequent to the liquidation and merger.

Section 334 of the Code relating to the basis of property received in liquidation provides, in part, as follows:

(b) LIQUIDATION OF SUBSIDIARY.-

*

(2) EXCEPTION.-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-

(A) the distribution is pursuant to a plan of liquidation adopted-

(i) on or after June 22, 1954, and

(ii) not more than 2 years after the date of the transaction described in subparagraph (B) * * *; and

(B) 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 (as defined in paragraph (3)) 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. * * *

Section 334(b)(2) of the Code, in pertinent part, unequivocally provides that `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 .' Section 1.334-1(c)(1) of the Income Tax Regulations can only be deemed to be explanatory of and in conformity with this definite statutory command. In substance, section 1.334-1(c)(1) of the regulations provides that property received with respect to stock owned immediately before the liquidation is the only property to which section 334(b)(2) of the Code applies. It does not apply to property received with respect to debts or other claims. In view of the statute, this section must be interpreted to mean that the basis provisions of section 334(b)(2) of the Code apply to all stock held with respect to which distribution is made in liquidation . That is to say, all stock purchases, irrespective of when made, are includible in determining basis so long as such stock is held at the time of distribution. However, if property is received for some other reason, such as in payment of a liability assumed, with respect thereto, the basis of such property is not determined under section 334(b)(2) of the Code, but rather under other applicable basis provisions of the law.

Under the facts presented, in effect, what M corporation did was to assume an obligation of the liquidated corporation to its minority shareholders. Accordingly, the subsequent payments should be treated as the release of a liability of N corporation assumed by M corporation. Thus, the taxpayer is entitled to have a basis attach to the assets to the extent the liability was assumed and paid.

In view of the foregoing, it is held that section 334(b)(2) of the Code is applicable in determining the basis of the assets received by M corporation from N corporation since the plan of complete liquidation was adopted not more than two years after the date of settlement in the stock-purchase agreement. Only the cost of the stock held immediately before the distribution in liquidation and with respect to which the distribution is made is includable in determining the basis of the assets received pursuant to section 334(b)(2) of the Code and section 1.334-1(c)(1) of the regulations. Amounts paid subsequent to the distribution in liquidation pursuant to the obligation assumed by M corporation to N's shareholders are treated as if such amounts are paid in discharge of a liability of N corporation, assumed by the M corporation. Therefore, the amounts so paid are included as part of the over-all basis of the assets acquired by M corporation.