SERVICE SAYS TECHNICAL CORRECTIONS TO TRA 1986 DO NOT AFFECT SECTION 333 LIQUIDATION DISTRIBUTTON ELECTIONS

Rev. Rul. 87-1

ISSUE

Does section 312(b) of the Internal Revenue Code, as amended by the technical corrections title of the Tax Reform Act of 1986, Pub. L. No. 99-154, 100 Stat. ____ (the "Act"), apply to complete liquidations for which a valid election under section 333 is in effect?

LAW

Section 333 of the Code generally provides the shareholders of a corporation with an election to defer the recognition of the shareholder-level gain that would otherwise result from distributions made in complete liquidation of the corporation. Notwithstanding a valid election under section 333, gain realized by a shareholder will be recognized to the extent of the greater of (i) the shareholder's ratable share of earnings and profits of the liquidated corporation or (ii) the portion of the assets received by the shareholder that consist of money, or of certain stock or securities distributed by such corporation.

Section 312(b) of the Code, as amended by section 1804(f) of the Act, provides that in the event of a distribution by a corporation of appreciated property with respect to its stock, the earnings and profits of such corporation shall be increased by the amount that the fair market value of any property so distributed exceeds its adjusted basis and shall be decreased, to the extent of the corporation's earnings and profits, by the fair market value of the property so distributed. This amendment is generally applicable to distributions made after September 30, 1984. As explained in the Report of the Committee on Ways and Means, however, this technical correction "is not intended to affect the determination of earnings and profits with respect to a liquidating distribution for purposes of section 333." H.R. Rep. No. 99-426, 99th Cong., 1st Sess. 897 (1985).

ANALYSIS AND HOLDING

As stated above, section 312(b) of the Code, as amended by section 1804(f) of the Act, provides for adjustments to a corporation's earnings and profits upon any distribution of appreciated property with respect to its stock. The amendment was made under the technical corrections title of the Act and was intended, in relevant part, to correct section 312(n)(4), as added by the Tax Reform Act of 1984, 1984-3 (Vol. 1) C.B. 88, by providing for the appropriate decreasing adjustment to earnings and profits as the result of a nonliquidating distribution of appreciated property. Congress did not intend that this technical correction would affect the determination of earnings and profits with respect to a liquidating distribution for purposes of section 333. H.R. Rep. No. 99-426 at 897.

Accordingly, the amendment under the Act to section 312(b) of the Code is inapplicable to distributions that are made as part of a section 333 liquidation. Subsections (b) and (c) of section 312, as in effect prior to the amendments made by the Act, continue to apply to such liquidating distributions. Thus, for example, any gain recognized from distributions by the liquidating corporation results in a corresponding increase to its earnings and profits.