Rev. Rul. 74-476

Advice has been requested whether the requirements of section 333 of the Internal Revenue Code of 1954 are satisfied, in the situation described below, when a liquidating corporation remains in existence to collect a Federal income tax refund.

Corporation X, having only non-corporate shareholders, adopted a plan of complete liquidation. In accordance with the plan, X distributed all of its property to its shareholders within one calendar month. The property distributed included a validly executed assignment of the right to receive from X a pro rata share of a refund of Federal income tax paid by X in prior years arising from a net operating loss sustained by X during the taxable year in which the liquidation took place.

X promptly filed its Federal income tax return, and timely filed a claim for refund arising from the net operating loss. X ceased its corporate business activity at the time of the first distribution in liquidation but remained in existence solely for the purpose of collecting and distributing any refund which might be received. After receiving the refund, X transferred to each shareholder his pro rata share of the refund, and X dissolved. The shareholders of X timely and properly elected to have the benefits of section 333 of the Code apply to the gain realized by them on the liquidation.

Section 333 of the Code provides a special rule for the treatment of gain on shares of stock owned by a qualified electing shareholder where, pursuant to a plan of liquidation adopted on or after June 22, 1954, property is distributed in complete liquidation of a domestic corporation within some one calendar month and the distribution is in complete cancellation or redemption of all of the stock of the corporation.

Pursuant to section 333(e) of the Code, a noncorporate qualified electing shareholder will recognize gain on the liquidation limited to the greater of his ratable share of the liquidating corporation's post-1913 earnings and profits or the sum of money received by him plus the fair market value of any stock or securities so received which were acquired by the liquidating corporation after December 31, 1953. The gain recognized will be treated as a dividend to the extent of the shareholders' ratable share of the earnings and profits of the liquidating corporation accumulated after February 28, 1913. The remainder of the gain which is recognized is treated as a short-term or long-term capital gain, as the case may be.

Section 1.333-1(b)(1) of the Income Tax Regulations provides, in part that it is not necessary that the corporation dissolve in the month of liquidation but that it is essential that a status of liquidation exist at the time the first distribution is made under the plan and that this status continue to the date of dissolution of the corporation. Section 1.333-(1)(b)(1) further provides that a status of liquidation exists when the corporation ceases to be a going concern and its activities are merely for the purpose of winding up its affairs, paying its debts, and distributing any remaining balance to its shareholders.

Section 334(c) of the Code provides that the basis of assets received in a liquidation to which section 333 applies shall be the same as the shareholder's basis in the stock, decreased by money received and increased by gain recognized under section 333(e). Section 1.334-2 of the regulations provides, in part, that the amount thus arrived at will be allocated to the various assets received in accordance with their fair market values.

Since X remained in existence solely for the purpose of collecting the Federal tax refund after distributing to its shareholders within the one calendar month its right to receive the refund, the requirements of section 333 of the Code and section 1.333-(b)(1) of the regulations are satisfied. Accordingly, the X shareholders may treat the gain realized upon the liquidation in accordance with section 333(e). For the purpose of applying the provisions of section 333(e), the receipt by a shareholder of the right to receive a ratable share of the proceeds of a claim for Federal tax refund will not be treated as the receipt of money. Upon receipt by an X shareholder of his pro rata share of the proceeds from the refund, he will recognize ordinary gain or loss to the extent of the difference between the proceeds received and the basis in his hands of the right assigned to him to receive such proceeds. The basis of the right will be determined under section 334(c) and the regulations thereunder. See Ralph R. Garrow, 43 T.C. 890 (1965), aff'd. per curiam, 368 F.2d 809 (9th Cir. 1966), and Mace Osenbach, 17 T.C. 797 (1951), aff'd., 198 F.2d 235 (4th Cir. 1952).