Rev. Rul. 64-257

Advice has been requested whether certain stock, distributed by a corporation to its shareholders pursuant to a plan of complete liquidation under the provisions of section 333 of the Internal Revenue Code of 1954, is considered as stock `acquired' after December 31, 1953, for purposes of section 333(e)(2) of the Code, under the circumstances described below.

In 1957, certain investment stock was acquired by a newly formed domestic corporation from a foreign holding corporation pursuant to a nontaxable reorganization as defined in section 368(a)(1) of the Code. The investment stock received in the 1957 exchange by the new corporation had been owned by its predecessor foreign corporation for many years prior to January 1, 1954.

In 1964, the domestic corporation adopted a plan of liquidation and distributed all its property within one calendar month under the provisions of section 333 of the Code. At the time of the adoption of such plan, each shareholder made and filed a timely election to have his gain on the liquidation recognized only to the extent provided in subsection 333(e) of the Code.

Section 333 of the Code provides a special rule as to the recognition of gain in the case of certain specifically described complete liquidations of domestic corporations. See section 333(a) of the Code and section 1.333-1 of the Income Tax Regulations.

Section 333(e) of the Code reads, in part, as follows:

* * * In the case of a qualified electing shareholder other than a corporation-

(1) there shall be recognized, and treated as a dividend, so much of the gain as is not in excess of his ratable share of the earnings and profits of the corporation accumulated after February 28, 1913 * * *; and

(2) there shall be recognized, and treated as short-term or long-term capital gain, as the case may be, so much of the remainder of the gain as is not in excess of the amount by which the value of that portion of the assets received by him which consists of money, or of stock or securities acquired by the corporation after December 31, 195o , exceeds his ratable share of such earnings and profits. (Emphasis supplied.)

Revenue Ruling 56-171 C.B. 1956-1, 179, holds that stock received by a corporate shareholder in exchange for stock of a corporation participating in a nontaxable statutory merger does not constitute stock `acquired' after December 31, 1953, for the purposes of section 333(e)(2) and (f)(1) of the Code, if the stock surrendered in the exchange by the corporate shareholder had been acquired prior to January 1, 1954. (Note: Through printing error, the last paragraph of Revenue Ruling 56-171, as it appears in C.B. 1956-1, refers to section 333(a)(2) of the Code rather than section 333(e)(2).)

In the instant case, the domestic corporation did not in 1957 merely exchange stock which it already held as an asset on December 31, 1953, for new stock pursuant to a plan of reorganization as was the case in Revenue Ruling 56-171. Instead, the domestic corporation acquired in 1957 for the first time the investment stock in question from a predecessor foreign corporation. Revenue Ruling 56-171 is applicable only to cases involving nontaxable exchanges of stock or securities already owned by the domestic corporation on December 31, 1953, such corporation being later liquidated under the provisions of section 333 of the Code. Thus, the situation in the instant case is distinguishable from the situation covered in Revenue Ruling 56-171.

The investment stock in this case was held as an asset (prior to the formation of the liquidating corporation in 1957) by a foreign corporation whose liquidation could not have qualified for treatment under the provisions of section 333 of the Code, since that section applies only to complete liquidations of domestic corporation. In this respect, the situation is similar to the one covered in Revenue Ruling 58-92, C.B. 1958-1, 174. There it was held that stock and securities acquired by a domestic corporation upon its organization in 1955 from an individual in a transaction to which section, 351 applied were `acquired' by it after December 31, 1953, within the meaning and for the purposes of section 333(e)(2) of the Code. This conclusion was reached because the statute, in effect, states that stock or securities distributed in a section 333 liquidation are always equivalent to cash unless such stock or securities were owned by an existing corporation on December 31, 1953.

Under the circumstances of this case the fact that the liquidating corporation acquired the investment stock held by its predecessor on December 31, 1953, in a nontaxable reorganization as defined in section 368(a)(1) of the Code is not determinative. What is determinative is that the stock was acquired after December 31, 1953, from a foreign corporation, one that could not have qualified for treatment under the provisions of section 333 of the Code.

Accordingly, in the instant case, it is held that the stock distributed by the dissolving corporation, pursuant to the plan of complete liquidation in 1964, was stock acquired after December 31, 1953, within the meaning of section 333(e)(2) of the Code and section 1.333-4 of the regulations and, therefore, is treated as equivalent to cash in computing the recognized gain to each shareholder.

Revenue Ruling 56-171, C.B. 1956-1, 179, distinguished.