Rev. Rul. 83-61

ISSUE

Whether the amount of gain recognized by qualified electing shareholders pursuant to section 333 of the Internal Revenue Code is determined by reference to the pro rata interest of each shareholder in each asset distributed.

FACTS

Corporation X, a domestic corporation, was owned 75 percent by A, an individual, and 25 percent by Z, a publicly supported organization exempt from tax under section 501(c)(3) of the Code. The X stock held by Z was not debt financed property within the meaning of section 514. The assets of X consisted of $100x in cash and real estate having a fair market value of $300x. X had no earnings and profits. The directors and shareholders of X adopted a plan of complete liquidation providing for the distribution of all of the real estate to A and all of the cash to Z in exchange for, and in cancellation of, all of the outstanding stock of X. The distribution in liquidation qualified under the provisions of section 333.

LAW AND ANALYSIS

Section 1001 of the Code provides, in part, that the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the property's adjusted basis.

Section 1001(c) of the Code, which replaced section 1002 for tax years beginning after December 31, 1976, provides, in part, that, except as otherwise provided, the entire gain or loss realized on the sale or exchange of property shall be recognized.

Section 333 of the Code provides, in part, that upon the liquidation of a corporation under certain specified conditions, the amount of gain recognized by a qualified electing shareholder is limited to the greater of (i) the shareholder's ratable share of the corporation's post-1913 earnings and profits; or (ii) the sum of the money received by the shareholder plus the fair market value of the stock or securities received which were acquired by the liquidating corporation after December 31, 1953.

Rev. Rul. 69-486, 1969-2 C.B. 159, considered an in-kind distribution of trust property under a trust instrument that required the trustee, upon the death of the life beneficiary, to distribute the corpus of the trust one-half to C, an individual, and one-half to X, a charitable organization exempt from tax under section 501(c) of the Code. At the time of the death of the life beneficiary, the trust assets consisted of promissory notes with a fair market value of $300x and an adjusted basis of $300x, plus common stock having a fair market value of $300x and an adjusted basis of $100x. C and X mutually agreed that C should receive the notes and X should receive the appreciated common stock. They requested that the trustee distribute the assets in that manner and the trustee complied with the request.

The holding of Rev. Rul. 69-486 was based upon a finding that the trustee was not authorized by the trust instrument or local law to make an allocation of specific property in kind. Since C and X were viewed as having an absolute right to a ratable in-kind distribution, Rev. Rul. 69-486 noted that the designation of specific assets and the distribution thereof to C and X was equivalent to a distribution to C and X of the notes and common stock pro rata, followed by an exchange between C and X of C's pro rata share of common stock for X's pro rata share of notes. Since, in substance, an exchange between C and X was deemed to occur, Rev. Rul. 69-486 held that C recognized gain on the disposition of C's share of the common stock in an amount determined under sections 1001 and 1002.

An examination of state law governing the rights of shareholders to corporate assets on liquidation indicates that shareholders do not have an absolute right to receive a ratable share of each asset distributed in liquidation. As a general rule, a majority shareholder may not force an unfair plan of distribution upon the minority. A minority shareholder has the right to receive the same treatment as the majority shareholder. In re: San Joaquin Light & Power Corp., 52 Cal. App. 2d 814, 127 P. 2d 29 (1942); Zimmerman v. Tide Water Associated Oil Co., 61 Cal. App. 2d 585, 143 P. 2d. 409 (1943). If the plan of dissolution is unfair, the minority shareholders may insist on a distribution in kind. Blanchard v. Commonwealth Oil Co., 116 So. 2d 663 (Fla. App. 1959), rehearing denied. (Jan. 18, 1960). On the other hand, if an in-kind distribution produces an unfair result, the minority may compel some other distribution. Shrage v. Bridgeport Oil Co., 31 Del. Ch. 305, 71 A.2d 882 (1950).

As suggested by the case law, equitable rather than legal principles control in determining the rights of shareholders in the corporation's assets in liquidation and, consequently, no uniform rule exists. Accordingly, as a practical matter it would be difficult to ascertain whether shareholder entitlement to a pro rata share of each asset distributed was present in state which requires nothing more than that a liquidating distribution be fair.

The express language of section 333 of the Code provides that gain shall be recognized by shareholders based on the nature of the assets received. The apparent meaning of the word "received" is that the shareholder should recognize gain only if the assets actually received constitute, in whole or in part, money or securities acquired by the liquidating corporation after 1953. Such an interpretation provides a rule of uniform application not dependent upon state law. In addition, the creation of a deemed exchange at the shareholder level in transactions treated as corporate liquidations under state law would be inconsistent with the purpose of Congress to allow tax-free treatment to shareholders receiving assets qualifying for nonrecognition treatment. Accordingly, an extension of Rev. Rul. 69-486 to the area of corporate liquidations is unwarranted.

HOLDING

The gain recognized by A and Z upon liquidation of X is determined by reference to the assets actually received as liquidating distributions.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 69-486 distinguished.