Rev. Rul. 77-456
Rev. Rul. 77-456; 1977-2 C.B. 102
- Cross-Reference
26 CFR 1.334-1: Basis of property received in liquidations.
- Code Sections
- LanguageEnglish
- Tax Analysts Electronic Citationnot available
Advice has been requested as to the allocation of the adjusted basis of the stock of a subsidiary corporation, S, to the property of S received by the parent corporation, P, in a liquidation of S described in section 332(b) of the Internal Revenue Code of 1954, to which section 334(b)(2) applies.
P purchased all of the stock of S for $480,000 in an arm's length transaction. The purchase price represented the fair market value of S's assets. Six months later P completely liquidated S pursuant to section 332 of the Code in a transaction in which the basis of the assets was determined under section 334(b)(2). On liquidation S had no liabilities and the value of its goodwill was accurately determined to be $84,000. On the date of distribution the net fair market value of all of S's assets was as follows:
Asset F.M.V.
Cash ____________________________________ $ 40,000
Accounts receivable
(face amount--$43,000) ________________ 42,000
Marketable securities ___________________ 42,000
Inventory _______________________________ 42,000
Equipment _______________________________ 84,000
Buildings _______________________________ 126,000
Goodwill ________________________________ 84,000
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Total _______________________________ $460,000
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Section 334(b)(2) of the Code provides, in part, that if property is received by a corporation (P) in complete liquidation of another corporation (S) within the meaning of section 332(b), and if the distribution is pursuant to a plan of liquidation adopted not more than 2 years after a certain percentage of the stock of S was acquired by P by purchase during a 12-month period beginning on the date of the first purchase acquisition of such stock, then the basis of the property in the hands of P will be the adjusted basis of the stock with respect to which the distribution was made.
Section 1.334-1(c)(4)(viii) of the regulations provides, in part, that the amount of the adjusted basis of the stock will be allocated as basis among the various assets received (except cash and its equivalent) both tangible and intangible (whether or not depreciable). It further provides that, ordinarily, such allocation wil be made in proportion to the net fair market values of such assets on the date received.
Rev. Rul. 66-290, 1966-2 C.B. 112, holds that the phrase "cash and its equivalent" as used in section 1.334-1(c)(4) of the regulations includes cash, currency, bank deposits, share accounts in savings and loan associations, checks, drafts, money orders, and any other similar items, but does not include accounts receivable, inventories, marketable securities, and other similar current assets.
Pursuant to section 1.334-1(c)(4)(viii) of the regulations, without affording particular significance to the word "ordinarily," the following allocation of the adjusted basis of the S stock to S's assets would be made:
(1) Decrease the adjusted basis of the S stock ($480,000) by the amount of cash and its equivalent ($40,000) to $440,000; then
(2) Allocate this amount, $440,000, in proportion to the net fair market values of all the remaining assets both tangible and intangible whether or not depreciable or amortizable. The following, therefore, would result:
Accounts receivable _____________________ $ 44,000
Marketable securities ___________________ 44,000
Inventory _______________________________ 44,000
Equipment _______________________________ 88,000
Building ________________________________ 132,000
Goodwill ________________________________ 88,000
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Total _______________________________ $440,000
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This allocation gives the accounts receivable an adjusted basis in P's hands in excess of their face value and their fair market value. But the word ordinarily as used in section 1.334-1(c)(4)(viii) of the regulations implicitly contemplates that in some cases a different method of allocation from that specifically set forth in that section (the net fair market values of the assets received) may be required to properly allocate costs to assets acquired. Realistically, accounts receivable are not collectible at more than face amount. Thus, a proper allocation of the adjusted basis of the stock should limit the amount allocable to accounts receivable to the face amount. However, unlike cash and its equivalent, accounts receivable can receive an allocated basis less than face when their value is greater than the allocable costs; realistically, collections can be less than face, but never more.
Accordingly, in the instant case, P's allocation of the adjusted basis of the S stock to S's assets distributed to P in complete liquidation of S is to be made as follows:
(1) Decrease the adjusted basis of the S stock ($480,000) by the amount of cash and its equivalent ($40,000) to $440,000; then,
(2) Allocate to the accounts receivable an amount equal to their face amount ($43,000); then,
(3) Allocate the remaining adjusted basis of the S stock, $397,000, in proportion to the net fair market values of all the remaining assets both tangible and intangible whether or not depreciable or amortizable. The following will result:
Marketable securities ___________________ $ 44,111
Inventory _______________________________ 44,111
Equipment _______________________________ 88,222
Building ________________________________ 132,333
Goodwill ________________________________ 88,223
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$397,000
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- Cross-Reference
26 CFR 1.334-1: Basis of property received in liquidations.
- Code Sections
- LanguageEnglish
- Tax Analysts Electronic Citationnot available
