Rev. Rul. 68-434

Advice has been requested whether an interim negative figure may be used in the calculation of the basis of property received by a qualified electing shareholder on the liquidation of a corporation pursuant to the provisions of section 333 of the Internal Revenue Code of 1954 under the circumstances described below.

Corporation X distributed all its property in complete liquidation during one calendar month pursuant to the provisions of section 333 of the Code. A , an individual, and a qualified electing shareholder, received in complete cancellation or redemption of all his stock of X , 300 x dollars in cash, property (other than stock or securities acquired by X after December 31, 1953) with a fair market value of 800 x dollars, and stock acquired by X after December 31, 1953, having a fair market value of 200 x dollars. A's ratable share of the earnings and profits of X accumulated after February 28, 1913, is 400 x dollars. The basis of the shares of X stock owned by A was 10 x dollars. A's realized gain is 1,290 x dollars, but under section 333(e) of the Code only 500 x dollars (300 x dollars in cash plus 200 x dollars of stock acquired after December 31, 1953) of this gain is recognized.

Section 334(c) of the Code provides that the basis of property received in liquidation under section 333 of the Code will be the same as the basis of the stock canceled or redeemed in the liquidation, decreased in the amount of any money received by the shareholder, and increased in the amount of gain recognized to him.

Where the amount of money received in a liquidation under section 333 of the Code is greater than the basis of the stock canceled or redeemed, a negative figure is obtained before adding the amount of gain recognized. While it is generally recognized that basis cannot be reduced below zero, an interim negative figure may be used in the determination of basis of property received in a liquidation under section 333 of the Code, since the final basis will always be zero or greater.

Accordingly, the basis of all the property other than money received by A is 210x dollars, computed as follows:

   Adjusted basis of stock canceled or redeemed___________ 10x  dollars