Rev. Rul. 69-172

Advice has been requested whether gain or loss is recognized to the subsidiary or its parent on the sale of the assets of a subsidiary corporation in the four situations described below.

Section 337(a) of the Internal Revenue Code of 1954 provides in general that if a corporation adopts a plan of complete liquidation and, within a 12-month period beginning on the date of the adoption of the plan, all of the assets of the corporation are distributed in complete liquidation, less those retained to meet claims, then no gain or loss will be recognized to such corporation from the sale or exchange by it of property within such 12-month period.

Section 337(c)(2) of the Code provides in part that section 337 of the Code will not apply in the case of a sale or exchange following adoption of a plan of complete liquidation, if section 332 of the Code applies with respect to such liquidation and the basis of the property of the liquidating corporation in the hands of the distributee is determined under section 334(b)(1) of the Code.

In Commissioner v. Court Holding Co., 324 U.S. 331 (1945), Ct. D. 1636, C.B. 1945, 58, the Supreme Court of the United States held that a sale of property by the shareholders of a corporation after receipt of the property as a liquidating distribution was taxable to the corporation when the corporation had in fact conducted all the negotiations and the terms of the sale had been agreed upon prior to the distribution of the property. In its decision in The United States v. Cumberland Public Service Co., 338 U.S. 451 (1950), Ct. D. 1727, C.B. 1950-1, 18, the Court held that a sale of assets by the shareholders after distribution of the assets by the corporation pursuant to a liquidation was not taxable to the corporation. This decision was based on the finding of fact by the trial court to the effect that the corporation had rejected an offer to sell the property and the negotiations had been carried on by the shareholders after receipt of the property in liquidation. The Court emphasized the distinction between a sale of assets by the distributing corporation and a sale by the shareholders. These decisions are based upon facts establishing whether the corporation or the shareholders actually made the sale.

Section 337 of the Code was enacted to provide a result that would obviate the necessity of determining whether a corporation in process of complete liquidation made a sale of its assets or whether the shareholder receiving the assets made the sale. See Senate Report No. 1622, 83d Congress, 2d Session, 48. However, the legislation does not cover questions as to whether a parent or subsidiary made the sale where the subsidiary is in process of complete liquidation. In deciding these questions the rationale of the decisions in Court Holding Co. and Cumberland Public Service Co. is relevant in determining whether a parent or a subsidiary corporation made the sale of the subsidiary's assets.

The foregoing is illustrated by the four situations described below. In all the situations described, P corporation is a manufacturing company and has as its wholly owned subsidiary, S corporation, that is also an operating company. The stock of S has been held by P for more than five years. Neither of the corporations is a collapsible corporation as defined in section 341(b) of the Code. No property excluded under section 337(b) of the Code is involved.

Situation 1

The shareholders of P adopted a plan of complete liquidation designed to meet the requirements of section 337 of the Code. Thereafter, P sold its assets except for the stock of S to an unrelated party. P distributed to its shareholders in complete liquidation the proceeds from the sale and the stock of S. The shareholders of S then adopted a plan of complete liquidation meeting all of the requirements of section 337 of the Code and S thereafter sold its assets to an unrelated party. S distributed to its shareholders in complete liquidation all the proceeds from the sale.

In this situation no gain or loss is recognized to P or to S on the sale of its assets because all the other requirements of section 337 of the Code were met.

Situation 2

P adopted a plan of complete liquidation of S pursuant to section 332 of the Code. S sold all of its assets to an unrelated party pursuant to negotiations conducted by S, and distributed the proceeds to P in complete liquidation. The shareholders of P then adopted a plan of complete liquidation meeting all of the requirements of section 337 of the Code and P thereafter sold its assets to an unrelated party. P distributed to its shareholders in complete liquidation the proceeds from the sale and the proceeds from the sale of the assets of S received in the liquidation of S.

In this situation section 337 of the Code is not applicable to the sale by S of all of its assets. Gain or loss is recognized to S because section 332 of the Code applied to the liquidation of S and the basis of the property of S in the hands of P is determined under section 334(b)(1) of the Code. However, no gain or loss is recognized to P on the sale of its assets because all the other requirements of section 337 of the Code were met.

Situation 3

Plans of complete liquidation were adopted for P and S. During the past several years, S had received numerous offers from an unrelated party to purchase its assets. S had consistently rejected these offers. All of the assets of S were distributed to P pursuant to section 332 of the Code. Thereafter, the assets of P (which included the assets of S) were sold to the unrelated party, and the proceeds were distributed to the shareholders of P in complete liquidation. Negotiations for the sale of the assets, including the assets of S, were in fact conducted and agreed upon by P.

Under these circumstances, because the facts establish that the assets were sold by P, and S had rejected all offers to sell, no gain or loss is recognized to P or S assuming that all of the other requirements of section 337 of the Code are met.

Situation 4

Plans of complete liquidation were adopted for P and S. Prior to this time S had entered into preliminary negotiations for the sale of its assets with an unrelated purchaser, Z, and both agreed in general to the terms of the sale. It was mutually agreed that the assets of S should be distributed to P pursuant to section 332 of the Code, and thereafter P would sell its assets (including the assets of S) to Z. The part of the sales agreement between P and Z that pertained to the assets of S closely paralleled the terms previously agreed to by S and Z. The transaction between P and Z was consummated and the proceeds were distributed to the shareholders of P.

Under these circumstances, because the facts establish that S had conducted the negotiations for and agreed in general to the terms of the sale of its assets and then transferred them to Z through P, gain or loss is recognized to S on the sale of its assets even though in form the assets were sold by P. No gain or loss is recognized to P on the sale of its assets assuming all of the other requirements of section 337 of the Code are met.