Rev. Rul. 56-541

Advice has been requested whether a corporation adopting a plan of complete liquidation and thereafter selling its assets to a new corporation qualifies as a nontaxable transaction within the meaning of section 337 of the Internal Revenue Code of 1954 under the circumstances described below.

A certain corporation owned and operated a baseball club. The capital stock was held by 45 shareholders, of which seven owned more than 80 percent stock interest of the corporation. The book value of the stock, per share, amounted to 650x dollars.

An interested individual and his associates formed a new corporation and purchased all the assets and assumed all liabilities of the old corporation, the latter being liquidated under the provisions of section 337 of the Code. The purchase price of the assets of the old corporation amounted to 50 percent in cash and the balance in the form of debenture notes issued by the new corporation. The purchase price of the old corporation's assets was equivalent to 1,500x dollars for each share of its stock outstanding in the hands of its shareholders.

Such individual and his associates subscribed for 55 percent of the shares of stock of the new corporation and certain of its debenture notes, for which they paid cash. The payment was equal to approximately 25 percent of the total purchase price of the assets of the old corporation. The individuals were not shareholders of the old corporation and were not related to the old shareholders. The shareholders of the old corporation, who owned 80 percent of the stock of that corporation, were permitted to purchase 45 percent of the stock of the new corporation. The participation of the shareholders of the old corporation was vital for community interest and for the support of the new corporation, and it was necessary also in order to retain certain individuals who had managerial know-how in baseball operations.

In view of the facts presented, the Internal Revenue Service holds as follows:

(1) The complete liquidation of the old corporation within the 12-month period beginning on the date of the adoption of the plan of liquidation, and the sale of all of the old corporation's assets to the new corporation within such 12-month period, came within the purview of section 337 of the Code. Therefore, no gain or loss is recognized to the old corporation from the sale of its assets. Moreover, neither gain nor loss is recognized to the old corporation in connection with the distribution of the cash and debenture notes to its shareholders in complete liquidation of that corporation under section 336 of the Code.

(2) No gain or loss is recognized to the new corporation upon the receipt of the assets purchased from the old corporation.

(3) The basis to the new corporation of the assets which were purchased from the old corporation is the cost of such assets, as provided by section 1012 of the Code. Such amount is measured by the cash and the face amount of the debenture notes which were given in payment for the assets. The basis thus determined should be allocated to the various assets acquired on the basis of the fair market values of such assets as of the effective date of the purchase. The basis allocated to the one-year uniform professional baseball players' contracts may be treated in the manner outlined in Revenue Ruling 54-441, C. B. 1954-2, page 101.

(4) The cash and the debenture notes which were received by the shareholders of the old corporation in complete liquidation are treated as in full payment in exchange for the stock of the old corporation, and gain or loss is recognized to the shareholders, measured by the difference between the sum of the cash and the fair market value of the debenture notes received and the adjusted basis of the stock of the old corporation surrendered. Such gain or loss represents a capital gain or capital loss under the provisions of subchapter P of Chapter 1 of the Code.