Rev. Rul. 69-426

Advice has been requested as to the method of determining the basis in the hands of a parent corporation of property received from its subsidiary in satisfaction of the subsidiary's indebtedness owed to the parent in the course of a complete liquidation of the subsidiary under the circumstances described below.

X corporation purchased for cash from an unrelated person all the outstanding stock of Y corporation and liquidated Y less than two years later. At the time of adoption of the plan of liquidation Y was indebted to X. The indebtedness was satisfied by the transfer of property (other than money) to X. The fair market value of the property exceeded its basis to Y. The property was sold by X immediately thereafter.

Sections 332(a) and 332(b) of the Internal Revenue Code of 1954 provide for nonrecognition of gain or loss to a parent corporation upon the receipt of property distributed in complete liquidation of its subsidiary.

Section 332(c) of the Code provides a special rule that if the subsidiary is indebted to the parent on the date of adoption of the plan of liquidation, then no gain or loss will be recognized to the subsidiary upon its transfer of property to the parent in satisfaction of such indebtedness.

Section 334(b)(1) of the Code provides that in a liquidation of a subsidiary to which section 332(a) or (b) of the Code applies, except as provided in section 334(b)(2) of the Code, the basis to the parent of the property received in liquidation with respect to the stock will be the same as the basis in the hands of the distributing subsidiary. In addition, section 334(b)(1) of the Code provides a similar carryover basis rule for property received in a transfer to which section 332(c) of the Code applies, if section 334(b)(2) of the Code does not apply.

On the distribution of property in complete liquidation of a subsidiary corporation, where the requirements of section 334(b)(2) of the Code are met, the basis of the property received by the parent corporation in the distribution will be the adjusted basis of the subsidiary corporation's stock to the parent with respect to which the distribution was made.

However, where a subsidiary transfers property to its parent in satisfaction of indebtedness owing to its parent, the transfer is not a distribution with respect to stock. Section 1.334-1(c)(1) of the Income Tax Regulations provides, in part, that property received with reference to stock owned by the parent corporation immediately before the liquidation is the only property to which section 334(b)(2) of the Code is applicable. Thus, the basis of the property received in satisfaction of indebtedness is governed by section 334(b)(1) of the Code.

Accordingly, the basis in the hands of X of the property received by X in satisfaction of the indebtedness owed to X by Y at the time of liquidation of Y is the same as the basis of such property in the hands of Y, as provided in section 334(b)(1) of the Code.