Rev. Rul. 67-299

Advice has been requested whether the transaction described below involves a distribution resulting from a genuine contraction of the corporation business within the meaning of section 1.346-1(a)(2) of the Income Tax Regulations.

A corporation which is engaged in the business of owning and leasing real estate adopted a plan of partial liquidation. Pursuant to the plan the corporation sold one of its operating parcels of real estate for cash. It used the sales proceeds to remodel some of its remaining parcels of real estate. Shortly thereafter, and within the same taxable year in which the plan was adopted, it distributed an amount of money equal to the sales proceeds to its shareholders in redemption of some of its stock.

Section 346(a)(2) of the Internal Revenue Code of 1954 provides that a distribution will be treated as in partial liquidation of a corporation if the distribution is not essentially equivalent to a dividend, is in redemption of a part of the stock of the corporation pursuant to a plan, and occurs within the taxable year the plan is adopted or within the succeeding taxable year. Section 1.346-1(a)(2) of the regulations states that an example of a distribution which will qualify as a partial liquidation under section 346(a)(2) of the Code is a distribution resulting from a genuine contraction of the corporate business.

In this case, the sale of one parcel of real estate was a potential contraction of the corporate business. However, the remodeling of some of the remaining property was an expansion of the corporation's business offsetting any possible contraction effected by the sale. Thus, the sale of real estate did not result in a genuine contraction of the corporate business, since the net effect of the transactions was to keep the corporate assets at the same level which existed prior to the sale.

Accordingly, the above distribution by the corporation to its shareholders does not qualify as a distribution resulting from a genuine contraction of the corporate business within the meaning of section 1.346-1(a)(2) of the regulations.