Rev. Rul. 70-6

Advice has been requested whether the stock sold under the circumstances described below was held by the taxpayer for more than six months.

In March 1969, X, a wholly-owned domestic subsidiary corporation of the taxpayer, also a domestic corporation, distributed portfolio stock of an unrelated corporation to the taxpayer. X had held this stock since 1962. The amount of the distribution, as determined under section 301(b)(1)(B)(ii) of the Internal Revenue Code of 1954 (the adjusted basis of the stock in the hands of X since the stock had a fair market value in excess of its adjusted basis) is reportable as a dividend pursuant to section 301(c) of the Code.

In July 1969, the taxpayer sold the stock, which was a capital asset, as defined in section 1221 of the Code, in its hands. The basis of the stock received in the distribution in the hands of the taxpayer was, as provided in section 301(d)(2)(B) of the Code, its adjusted basis in the hands of X immediately before the distribution. The question is whether the gain realized upon the sale of the stock is reportable as gain from the sale of a capital asset held for more than six months ("long-term capital gain").

Section 1223(2) of the Code provides that in determining the period for which the taxpayer has held property, however acquired, there shall be included the period for which such property was held by any other person if, for the purpose of determining gain or loss from a sale or exchange, such property has the same basis in whole or in part in his hands as it would have in the hands of such other person.

The basis of the stock received in the distribution by the taxpayer was, as provided in section 301(d)(2)(B) of the Code, its adjusted basis in the hands of X immediately before the distribution. Therefore, the provisions of section 1223(2) of the Code apply in determining the holding period of the stock received by the taxpayer in the distribution.

Accordingly, it is held that the gain realized by the taxpayer on the sale of the stock received by it in the distribution is reportable as long-term capital gain.

It should be noted, however, that the provisions of section 1223(2) of the Code do not apply in determining the holding period of property received by a noncorporate distributee, or a corporate distributee where the fair market value of the property received is less than the adjusted basis of such property in the hands of the distributing corporation, since the basis of such property in the hands of the distributee as determined under sections 301(d)(1) and 301(d)(2)(A) of the Code, respectively, would be the fair market value of such property rather than its adjusted basis.