Rev. Rul. 76-90

Advice has been requested whether a domestic subsidiary corporation S, wholly owned by a foreign corporation P, may utilize the failure to secure an advance ruling under section 367 of the Internal Revenue Code of 1954 to obtain nonrecognition of gain on the sale of an asset pursuant to a plan of complete liquidation of the domestic subsidiary corporation.

P, the foreign parent corporation, was not subject to taxation in the United States and all of its outstanding stock was owned by foreign shareholders. S was not a collapsible corporation as defined in section 341(b) of the Code. A plan for the complete liquidation of S was adopted by P. Immediately thereafter, S sold one of its assets to an unrelated party at a gain and then distributed the proceeds from the sale and its remaining assets to P in complete liquidation. An advance ruling under section 367 was not secured.

S contends that the gain resulting from its sale of the asset pursuant to the plan of complete liquidation is not recognized under the general rule of section 337(a) of the Code because P, by reason of the failure to secure an advance ruling under section 367, would not be considered to be a corporation. Therefore, S maintains that section 332, dealing with complete liquidations of subsidiary corporations, does not apply to the liquidation. If section 332 is applicable, the gain will be recognized to S because section 337(c)(2)(A) makes the nonrecognition of gain rule of section 337(a) inapplicable where section 332 applies. Section 1.337-1 of the Income Tax Regulations.

The question presented is whether S may utilize the failure to secure an advance ruling under section 367 of the Code to avoid recognition of the gain on the sale of the asset pursuant to the plan of complete liquidation.

The provisions of section 367 of the Code were not intended to afford taxpayers an option to escape the tax consequences that would otherwise follow but for the application of that section. See Rev. Rul. 64-177, 1964-1 (Part 1) C.B. 141, which holds that a domestic corporation may not successfully utilize the failure to secure advance clearance under section 367 to defeat the application of sections 332 and 334(b)(1) in order to obtain a stepped up basis for the assets of a foreign corporation acquired in an exchange described in section 332.

Accordingly, S is not entitled to utilize the failure to secure an advance ruling under section 367 of the Code to avoid recognition of gain on the sale of the asset pursuant to the plan of complete liquidation. Therefore, under these circumstances, sections 332 and 336 apply to the complete liquidation of S into P and gain is recognized to S on the sale of the asset. See sections 337(c)(2)(A), 1001, and 1002.