Rev. Rul. 58-374
Clarified by Rev. Rul. 83-73
Advice has been requested concerning the Federal income tax consequences of a transferee's payment of a liquidated transferor's Federal income taxes and of the receipt by the transferee of a refund of the transferor's excess profits taxes under the circumstances as described below.
M corporation, a registered holding company, held 94 percent of the stock of N corporation, a public utility corporation, and N in turn onwed all of the stock of O corporation, which owned and operated oil and gas producing properties. In 1944, pursuant to an order of the Securities and Exchange Commission, N sold all of its holdings in O to M. M then liquidated O , cancelled all of O's stock and sold O's properties acquired in the liquidation to an independent corporation. The entire transaction was considered by all parties as a transaction necessary or appropriate to effectuate the provisions of section 11(b) of the Public Utility Holding Company Act of 1935, 15 U.S.C. 79k(b). No gain or loss was recognized to N on the transaction under the provisions of sections 371(d) and (f) of the Internal Revenue Code of 1939. The contract of sale between M and N provided that as part of the purchase price M should pay N an amount equal to the cash held by O at the time of closing and that the price should be further adjusted by the net value or burden of the current items of O , at that time, such net value or burden to be determined by final liquidation of such items. Supplementing this latter provision, the parties in 1950 stipulated that after a certain date that year all amounts paid or received by M with respect to the current items of O should be paid or received for the account of N . In 1950, M , as transferee of O , paid an additional Federal income tax liability of O for 1944, plus interest thereon, in a total sum of 142 x dollars. N then reimbursed M in the same year for the additional tax and interest. In their respective Federal income tax returns for 1950, N claimed the amount of interest reimbursed to M as an interest deduction, while M reported it as interest income but, having paid it for N , offset it by an equivalent deduction. In 1952, M , as transferee of O , received refunds of 357 x dollars of O's excess profits tax for the taxable years 1942, 1943, and 1944, plus interest of 104 x dollars. M reported the interest so received in its 1952 income tax return. M's tax for 1952 attributable to the interest amounted to 56 x dollars. In compliance with the supplemented sales contract, M paid N the entire amount of O's excess profits tax refund plus the interest received, less the 56 x dollars income tax paid by M on the interest reported in its 1952 return. N credited the entire net payment to its surplus account and reported none of the amount as income for 1952.
In F. Donald Arrowsmith, et al. v. Commissioner , 344 U.S. 6, Ct. D. 1752, C.B. 1952-2, 136, the petitioners, who had equal stock ownership in a corporation in liquidation, reported distributions received from the corporation as capital gains. Four years subsequent to the liquidation, a judgment was rendered against the corporation and against one of the petitioners individually, which, as transferees of the assets of the corporation, the petitioners paid. The Supreme Court of the United States held there that the nature of the loss sustained by payment of the judgment may be classified by considering all of the liquidation transaction events and that the loss was therefore a capital loss. The shareholders' liability as transferees was not based on any ordinary business transaction of theirs apart from the liquidation proceedings.
Accordingly, it is held that the principle of the Arrowsmith case, supra , is applicable to the facts in the instant case. The reimbursement by N to M for payment of the income tax deficiency of O and the receipt of the refund of excess profits tax paid to M as transferee of O and transmitted to N pursuant to the amended sales contract relate back to the sale of the shares of O stock and, accordingly, retain their identity as adjustments to the sale price of the stock. The contract of sale actually required all these adjustments to price. Since the original sale was nontaxable, no gain or loss is recognized with respect to either of these amounts.
Since N did not receive any of O's assets, it had no liability for payment to the Government of the interest on O's income tax deficiency; neither did N have any right to demand receipt from the Government of interest on O's overpayment of excess profits tax, since N's rights to any refund stemmed entirely from the sales contract. The interest items, therefore, lose their character as interest with respect to N . Accordingly, it is further held that N is not entitled to any interest deduction for its reimbursement of interest paid by M , and the interest adjustment with M for the refund of excess profits taxes in 1952 constitutes a nontaxable adjustment to the sale price of O's stock.