Rev. Rul. 57-296

Advice has been requested whether, under the facts hereinafter stated, the basis of assets received by a corporation upon the complete liquidation of its wholly owned subsidiary is determined under section 334(b)(1) of the Internal Revenue Code of 1954.

P corporation, more than two years prior to the date of the transaction now in question, acquired 100 percent of the stock of S corporation. S suffered operating losses and P made several cash advances to it, receiving back notes payable of S . During November 1954, P transferred the S notes to S in exchange for additional shares of stock of S , the new shares received constituting over 80 percent of the shares of stock of S then outstanding.

In order to make the resources of P available for a contemplated substantial expension of the business of S , it was decided that the best interests of the corporations and the stockholders of P would be served if S were liquidated and its operations continued as a division of P . Accordingly, during March 1956, all of the assets of S were transferred to P in complete liquidation of S within the meaning of section 332(b) of the Code.

At issue is whether the basis of the assets received by P in the liquidation is to be determined under section 334(b)(1) or under section 334(b)(2) of the Code.

Section 334 of the Code provides in part:

(b) LIQUIDATION OF SUBSIDIARY.-

(1) IN GENERAL.-If property is received by a corporation in a distribution in complete liquidation of another corporation (within the meaning of section 332(b)), then, except as provided in paragraph (2), the basis of the property in the hands of the distributee shall he the same as it would be in the hands of the transferor. * * *

(2) EXCEPTION.-If property is received by a corporation in a distribution in complete liquidation of another corporation (within the meaning of section 332(b)), and if-

(A) the distribution is pursuant to a plan of liquidation adopted-

(i) on or after June 22, 1954, and

(ii) not more than 2 years after the date of the transaction described in subparagraph (B) (or in the case of a series of transactions, the date of the last such transaction); and

(B) 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), was acquired by the distribute by purchase (as defined in paragraph (3)) during a period of not more than 12 months, then the basis of the property in the hands of the distributee shall be the adjusted basis of the stock with respect to which the distribution was made. * * *

(3) PURCHASE DEFIND.-For purposes of paragraph (2)(B), the term `purchase' means any acquisition of stock, but only if-

*

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

In the instant case, although P acquired over 80 percent of the stock of S in one transaction within the two-year period preceding the adoption of the plan of liquidation of S , section 334(b)(2) of the Code is not applicable, because the acquisition was not a purchase within the meaning of section 334(b)(3). The acquisition by P of additional stock of S in exchange for the notes of S , after which P owned all of the outstanding stock of S , constituted an exchange to which section 351 applies and comes within the exception of section 334(b)(3)(B) quoted above.

Accordingly, the Internal Revenue Service holds that, under section 332 of the 1954 Code, no gain or loss is recognized upon the receipt by P of the assets distributed in complete liquidation of S and, under section 334(b)(1), the basis of the assets so received by P is the same as the basis of such assets in the hands of S immediately prior to the liquidation.