Rev. Rul. 80-177

ISSUE

Is a shareholder of a liquidating corporation under the circumstances described below in receipt of the liquidating distribution at the time the distribution first becomes payable rather than on the date it is actually received by the shareholder upon surrender of his stock?

FACTS

Pursuant to a plan of complete liquidation adopted by a domestic corporation, each shareholder was notified prior to February 15, 1978, that he would be entitled to receive a distribution in liquidation upon surrender of his shares of stock at any time after March 1, 1978. As of March 1, 1978, all of the corporation's liabilities had been discharged and its assets had been reduced to cash, and events had progressed to such a point that there was no likelihood that the liquidation would not be consummated. Under the circumstances, the shareholders' rights "as shareholders" were effectively terminated when the distribution first became payable, rather than upon the shareholders' actual receipt when they surrendered their stock. All that the shareholders had to do was turn in their shares and receive their money. Under local law the surrender of their stocks did not cause them to relinquish any rights which would constitute a "substantial limitation or restriction" on receipt of the money within the meaning of section 1.451-2(a) of the Income Tax Regulations.

The taxpayer, a United States person who had been a shareholder of the corporation for several years prior to 1978, used the cash receipts and disbursements method of accounting and filed federal income tax returns on the basis of a calendar year. In January 1979, the taxpayer surrendered all of the shares of stock to the corporation and received a single liquidating distribution in complete liquidation on that date.

LAW AND ANALYSIS

Section 331 of the Code provides the general rule that amounts distributed in complete liquidation of a corporation will be treated as in full payment in exchange for the stock. Neither section 331 nor the regulations thereunder set forth rules for determining when a distribution is received by the shareholder. The legislative history of section 331 indicates that its purpose was to characterize a liquidating distribution as an exchange (before the enactment in 1924 of the predecessor of section 331 such a distribution had been treated as a dividend) and there is no indication that Congress was concerned with establishing rules as to when a liquidating distribution is received by a shareholder. S. Rep. No. 398, 68th Cong., 1st Sess. 11-12 (1924), 1939-1 (Part 2) C.B. 266, 274 and H.R. Rep. No. 179, 68th Cong., 1st Sess. 11 (1924), 1939-1 (Part 2) C.B. 241, 249. Thus, all rules applicable to the receipt of income, including the constructive receipt doctrine, are applicable in determining when a liquidating distribution is received by a shareholder under section 331. However, with regard to the requirement of section 337(a) that all of the assets of a corporation be distributed in complete liquidation (less assets retained to meet claims) within the 12-month period beginning on the date of adoption of a plan of complete liquidation, see Vern Realty, Inc. v. Commissioner, 58 T.C. 1005, 1012 (1972), aff'd., Civil No. 73-1030 (1st Cir. April 26, 1973), in which it was indicated that such requirement is not met unless the corporation actually distributes all of its assets within the 12-month period.

Section 451(a) of the Code provides that the amount of any item of gross income will be included in the gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period.

Section 1.451-1(a) of the Income Tax Regulations provides that gains, profits, and income are to be included in gross income for the taxable year in which they are actually or constructively received by the taxpayer unless includible for a different year in accordance with the taxpayer's method of accounting. Section 1.451-1(a) also provides that under the cash receipts and disbursements method of accounting, the amount is includible in gross income when actually or constructively received.

Section 1.451-2(a) of the regulations provides that income, although not actually reduced to a taxpayer's possession, is constructively received by the taxpayer in the taxable year during which it is credited to the taxpayer's account, set apart for the taxpayer, or otherwise made available so that the taxpayer may draw upon it at any time, or so that the taxpayer could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, section 1.451-2(a) further provides that income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions.

In the present case, the liquidating distribution was payable March 1, 1978. There was no doubt that the liquidation would be consummated and that the distribution would be made since all liabilities had been discharged, the assets had been reduced to cash, and events had advanced to such a point that there was no likelihood that the liquidation would not be consummated. Furthermore, under the circumstances, the shareholders' rights "as shareholders" were effectively terminated when the distribution first became payable, rather than upon the shareholders' actual receipt when they surrendered their stock, since all they had to do was present the certificates and receive their money. The requirement that the certificates had to be presented for payment of the distribution is indistinguishable from the presentation of a pass book for crediting of interest earned on a savings account, and it did not represent a substantial restriction on the shareholders' right to the money under section 1.451-2 of the regulations. Since the shareholder used the cash receipts and disbursements method of accounting, and filed federal income tax returns on the basis of a calendar year, this item of income should have been included in gross income in 1978, the year the distribution was constructively received and not in 1979 when it was actually received.

HOLDING

Under the facts and circumstances of this case, the shareholder was in constructive receipt of the liquidating distribution on March 1, 1978, the time the distribution first became payable.