Rev. Rul. 80-358

Is the parent's (P) basis in a subsidiary's (T) assets received in a complete liquidation within the meaning of section 332(b) of the Internal Revenue Code determined with reference to section 334(b)(1) or section 334(b)(2)?

FACTS

S is a corporation engaged in a service business. For many years S has owned all of the stock of T, a corporation engaged in the same business as S. On September 30, 1975, P, a holding company, purchased, within the meaning of section 334(b)(3) of the Code, all of the outstanding stock of S for cash from an unrelated seller, with T remaining a wholly owned subsidiary of S. On December 31, 1976, P, pursuant to a plan of liquidation, completely liquidated S within the meaning of sections 332(b) and 334(b)(2), thus directly acquiring all of the stock of T. The basis of the stock of T in the hands of P was determined under section 334(b)(2). On January 3, 1977, P, pursuant to a plan of liquidation adopted on that date, liquidated T, within the meaning of section 332(b), and received T's assets.

LAW AND ANALYSIS

The basis of assets received by a corporation upon the liquidation of another corporation within the meaning of section 332(b) of the Code is generally a carryover basis under section 334(b)(1). However, an exception to this general rule is contained in section 334(b)(2), which provides that the basis of assets so received in complete liquidation will be determined with reference to the adjusted basis of the parent corporation in the stock of the liquidated subsidiary, provided the requirements of section 334(b)(2) are met. One of these requirements, contained in section 334(b)(2)(B), is that stock of the distributing corporation possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote, and at least 80 percent of the total number of shares of all other classes of stock (except nonvoting stock which is limited and preferred as to dividends), must have been acquired by the distributee by purchase during a specific 12-month period. For this purpose, the term "purchase" is defined in section 334(b)(3), which provides:

(3) Purchase defined.--For purposes of paragraph (2)(B), the term "purchase" means any acquisition of stock, but only if--

(A) the basis of the stock in the hands of the distributee is not determined (i) in whole or in part by reference to the adjusted basis of such stock in the hands of the person from whom acquired, or (ii) under section 1014(a) (relating to property acquired from a decedent),

(B) the stock is not acquired in an exchange to which section 351 applies; and

(C) the stock is not acquired from a person the ownership of whose stock would, under section 318(a) be attributed to the person acquiring such stock.

Notwithstanding subparagraph (C) of this paragraph, for purposes of paragraph (2)(B), the term "purchase" also means an acquisition of stock from a corporation when ownership of such stock would be attributed under section 318(a) to the person acquiring such stock, if the stock of such corporation by reason of which such ownership would be attributed was acquired by purchase (within the meaning of the preceding sentence).

Section 318(a) of the Code provides that for the purposes of those provisions of Subchapter C of the Code to which the rules in this section are expressly made applicable, if 50 percent or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, that person shall be considered as owning the stock owned, directly or indirectly, by or for such corporation, in that proportion which the value of the stock which such person so owns bears to the value of all the stock in such corporation.

In the present case, immediately prior to P's liquidation of S and acquisition of the stock of T, P owned all the stock of S. P therefore acquired the stock of T from a corporation (S) whose ownership of the T stock was attributable to P under section 318(a) of the Code. Moreover, P had acquired the stock of S by purchase, within the meaning of section 334(b)(3), from an unrelated seller. P's acquisition of the stock of T therefore qualified as a purchase within the meaning of the second sentence of section 334(b)(3). The issue of whether P's basis in the T stock is determined under section 334(b)(1) or section 334(b)(2) thus depends upon whether P's purchase of the requisite 80 percent of the T stock occurred during the 12-month period specified in section 334(b)(2)(B).

Section 334(b)(2)(B)(ii) of the Code specifies that if any of the stock of the distributing corporation (T) was acquired in an acquisition which is a purchase within the meaning of the second sentence of section 334(b)(3), then the 12-month period within which the 80 percent ownership of the stock of the distributing corporation (T) must be acquired by the distributee (P) begins on the date on which the distributee is first considered under section 318(a) as owning stock owned by the corporation (S) from which such acquisition was made.

P was first considered under section 318(a) of the Code as owning stock of T on September 30, 1975, the date upon which P acquired the stock of S. However, P's "purchase" (within the meaning of section 334(b)(3)) of the stock of T did not occur until December 31, 1976, the date upon which the liquidation of S occurred. Therefore, P's "purchase" of the requisite amount of the stock of T did not occur within the 12-month period specified by section 334(b)(2)(B).

HOLDING P's basis in T's assets received by P in complete liquidation of T is determined under section 334(b)(1) of the Code.