Rev. Rul. 64-177

Advice has been requested whether a domestic corporation may utilize its failure to secure an advance ruling under section 367 of the Internal Revenue Code of 1954 to obtain a stepped up basis for assets acquired from a foreign corporation in an exchange described in section 332 of the Code.

X , a domestic corporation, owned all of the stock of Y , a foreign corporation. Y's assets had a fair market value of 11 x dollars but an adjusted basis of only 4 x dollars. Y's stock in the hands of X had an adjusted basis of 10 x dollars. Without first securing an advance ruling under section 367 of the Code, X acquired the assets of Y in an exchange described in section 332 of the Code. X included in its income gain of 1 x dollars realized from the transaction and sought to accord to the assets obtained from Y an adjusted basis of 11 x dollars, for depreciation and other purposes. If the transaction was a tax-free liquidation under section 332 of the Code the basis of the assets acquired from Y would be 4 x dollars under section 334(b)(1) of the Code. The question arises whether X may successfully utilize its failure to secure section 367 clearance to defeat the application of sections 332 and 334(b)(1) of the Code.

The provisions of what is now section 367 of the Code were first enacted to close `a serious loophole for avoidance of taxes' through the use of foreign corporations by providing the Commissioner with a means to prevent such tax avoidance; they were not intended to afford taxpayers an option to escape the tax consequences which would follow but for that section. See H.R. Report No. 708, Seventy-second Congress, First Session, 20 (1932), C.B. 1939-1 (Part 2), 457, 471. Statutory requirements intended solely for the protection of the Government may be invoked only at the instance of the Government. Accordingly, in the instant case, X is not entitled to utilize to its advantage its failure to secure section 367 clearance. Hence, the transaction constitutes a tax-free liquidation under section 332 of the Code, and, by virtue of section 334(b)(1) of the Code the basis of the assets of Y in the hands of X is 4 x dollars.