Rev. Rul. 76-239

Advice has been requested concerning the taxable status of a distribution made by a corporation under the circumstances described below.

On March 31, 1975, M, a domestic corporation that files its Federal income tax return on a calendar year basis, distributed 600x dollars to its shareholders with respect to its stock. There was no intention to liquidate M at that date. On June 30, 1975, M adopted a plan of liquidation. M subsequently sold certain of its assets between June 30, 1975, and December 31, 1975. M realized 100x dollars gain from the sale of its assets after June 30, 1975, that was not recognized for the taxable year 1975 under section 337 of the Internal Revenue Code of 1954. M distributed the remainder of its assets in complete liquidation before December 31, 1975. M had no accumulated earnings and profits as of December 31, 1974, and had 500x dollars current earnings and profits for its 1975 taxable year exclusive of the 100x dollars of nonrecognized gain.

The specific question is whether the 100x dollars of gain realized but not recognized by M increases its current earnings and profits for its 1975 taxable year. If earnings and profits are increased, the entire 600x dollars distribution on March 31 will be a dividend under section 316 of the Code. Otherwise, only 500x dollars will be a dividend.

Section 312(f)(1) of the Code provides, in part, that gain or loss realized from the sale or other disposition (after February 28, 1913) of property by a corporation shall increase or decrease the earnings and profits to, but not beyond, the extent to which such a realized gain or loss was recognized in computing taxable income under the law applicable to the year in which such sale or disposition was made.

Section 337 of the Code provides that a corporation shall not recognize gain or loss on the sale or exchange of property during the 12-month period following the adoption of a plan of liquidation if all its assets are distributed (less assets retained to meet claims) within such 12-month period.

Accordingly, it is held that the 100x dollars gain realized from M's sale or exchange of its assets pursuant to M's plan of liquidation and not recognized under section 337 of the Code, will not increase M's earnings and profits for its 1975 taxable year pursuant to the specific provisions of section 312(f)(1). Thus, only 500x dollars of the 600x dollars distributed will be dividend to M's shareholders under sections 316 and 301(c)(1). The appropriate portion of the other 100x dollars distributed will be treated by each shareholder as a reduction of the adjusted basis of stock under section 301(c)(2) and, if such amount exceeds the shareholder's basis, to the extent thereof, as a gain from the sale or exchange of property under section 301(c)(3).