Rev. Rul. 67-412

The Internal Revenue Service will follow the decision of the United States Court of Appeals for the Fourth Circuit in United Contractors, Inc. v. Commissioner , 344 F.2d 123 (1965), affirming T.C. Memo. 1964-68, in the disposition of cases for taxable years beginning before January 1, 1966.

In that case, the court held that no portion of a parent corporation's intercompany profits, previously eliminated from a consolidated return turn in 1951, constitutes income to the parent in 1959 when the parent sold its stock in the subsidiary to an unaffiliated corporation.

This decision is not in accord with the position, as set forth in Revenue Ruling 60-245, C.B. 1960-2, 267, that when the parent sells its stock in the subsidiary to an unaffiliated corporation the previously eliminated intercompany profit less certain adjustments is taxed to the parent at ordinary income rates and at that time the basis of the property in the hands of the subsidiary is increased by the amount of the intercompany profit includable in the income of the parent. Therefore, Revenue Ruling 60-245 is revoked.

Thus, with respect to taxable years beginning before January 1, 1966, the basis of property, with respect to which gain was eliminated upon sale by a parent corporation to its subsidiary, will not be affected by a sale by the parent of its stock in the subsidiary.

For taxable years beginning after December 31, 1965, sections 1.1502-13 and 1.1502-31 of the Income Tax Regulations provide that the basis in the hands of the purchasing member will be its cost and the selling member's intercompany profit will be deferred and included in income upon the occurrence of the events in paragraphs (d), (e), and (f) of section 1.1502-13 of the regulations.

¹ Based on Technical Information Release 764, dated September 28, 1965.