Rev. Rul. 69-241

Advice has been requested as to the proper treatment, under the nonrecognition of gain provisions of section 1033 of the Internal Revenue Code of 1954, of the transaction described below.

Corporation X is an integrated manufacturer of forests products. Its source of raw material includes virgin timberland. In August 1967, the United States Army Corps of Engineers notified X that part of its timberlands would be taken, by condemnation if necessary, for the construction of a dam. In September 1967, for the purpose of replacing the timberlands to be taken by the Corps of Engineers, X acquired all of the stock of corporation Y which owned timberlands "similar or related in service or use" to those of X. In October 1967, pursuant to a prearranged plan, the timberlands of Y, as well as Y's other property, were distributed to X in a complete liquidation of Y, a transaction in which the basis of such property in the hands of X was determined in accordance with the provisions of section 334(b)(2) of the Code (i.e., the basis of the property in the hands of X is the adjusted basis of Y's stock in the hands of X). In December 1967, X, under threat of condemnation, sold certain of the timberlands it held in August 1967 (prior to the acquisition of the Y stock) to the Corps of Engineers. The sale resulted in a gain which X elected to treat under the provisions of section 1033 of the Code.

Section 1033(a) of the Code provides, at the election of the taxpayer, for the nonrecognition of gain realized upon the involuntary conversion of property by condemnation if, during the specified replacement period, the taxpayer purchases other property "similar or related in service or use" or purchases stock in the acquisition of control of a corporation owning such property. Section 1033(c) of the Code provides that the basis of the replacement property or stock shall be its cost less the gain not recognized upon the conversion under the provisions of section 1033(a) of the Code. Section 1033(a)(3)(A)(ii) states that the taxpayer shall be considered to have purchased property or stock only if, but for the provisions of section 1033(c) of the Code, the unadjusted basis of such property or stock would be its cost within the meaning of section 1012 of the Code. Section 1033(a)(3)(A)(i) of the Code states that no property or stock acquired before the disposition of the converted property shall be considered to have been acquired for the purpose of replacing such converted property unless held by the taxpayer on the date of such disposition.

The question presented in the instant case is whether the property received upon the liquidation of Y can be treated as the replacement property for purposes of section 1033(a) of the Code. The Y stock itself cannot be so treated because it was not held by X on the date of the disposition of the timberlands to the Corps of Engineers within the meaning of section 1033(a)(3)(A)(i) of the Code.

In the instant case, X purchased the stock of Y for the purpose of acquiring Y's property. While X, as a matter of form, owned Y's stock, this ownership was merely transitory since it was the initial step of a prearranged plan the intent, purpose, and result of which was a single transaction to acquire Y's property.

Pursuant to section 334(b)(2) of the Code, the unadjusted basis of the timberlands in the hands of X would be the adjusted basis of the Y stock in X's hands which would be determined by the cost to X of the Y stock. Thus, the basis of the timberlands in the hands of X represents their cost within the meaning of section 1012 of the Code.

Accordingly, it is held that for purposes of section 1033(a) of the Code, X will be considered to have purchased the timberlands received upon the liquidation of Y, and since the timberlands are "similar or related in service or use" to the converted timberlands and were acquired within the prescribed replacement period for the purpose replacing the converted timberlands, the replacement requirements of section 1033(a) of the Code have been met. The basis of the timberlands would be their cost, as determined under section 334(b)(2) of the Code, reduced by the amount of gain not recognized upon the conversion as required by section 1033(c) of the Code.

See Revenue Ruling 69-242, this page, which holds that an individual, who pursuant to a prearranged plan purchases all of the stock of a corporation and liquidates it, will be considered to have purchased the property received in the distribution upon the liquidation for purposes of section 1033(a) of the Code.