Rev. Rul. 63-125

Since the publication of Revenue Ruling 58-241, C.B. 1958-1, 179, the Internal Revenue Service has been asked whether the Ruling's holding that `* * * section 337 cannot be availed of by a collapsible corporation, as defined in section 341(b), * * *' applies where the shareholders of the corporation will not be subject to the collapsible treatment provided by section 341(a) of the Internal Revenue Code of 1954 because of the applicability of one or more of the limitations of section 341(d) of the Code.

Section 337(a) of the Code provides that if a corporation adopts a plan of complete liquidation and within twelve months liquidates, gain or loss from the sale of assets during that period is not recognized. Under the provisions of section 337(c) of the Code the nonrecognition treatment accorded by section 337(a) of the Code does not apply to a collapsible corporation as defined in section 341(b) of the Code. Consequently, even though the shareholders of the corporation would not be subject to section 341(a) treatment because of the applicability of one or more of the limitations of section 341(d) of the Code, the corporation could not avail itself of the tax treatment accorded to the sale of property made pursuant to the requirements of section 337(a) of the Code. The fact that, for example, section 341(d)(3) of the Code applies so that the tax treatment provided in section 341(a) would not govern a sale, exchange or distribution described in section 341(a) of the Code does not make a collapsible corporation eligible for the tax treatment provided by section 337 of the Code.

This result follows from the specific provisions of section 337(c) of the Code which states that section 337(a) does not apply to any sale or exchange by a collapsible corporation `* * * as defined in section 341( b ) * * *.' (Emphasis supplied.)

Section 1.337-1 of the Income Tax Regulations interpreting section 337(c) of the Code, provides in pertinent part as follows:

* * * Sales or exchanges made by a collapsible corporation ( as defined in section 341(b) ) are excluded from the operation of section 337 by section 337(c). Accordingly, section 337 does not apply to any sale or exchange of property whenever the distribution of such property in partial or complete liquidation to the shareholders in lieu of such sale or exchange would have resulted in the taxation of the gain from such distribution in the manner provided in section 341(a) as to any shareholder or would have resulted in the taxation of the gain in such manner, but for the application of section 341(d) . * * * (Emphasis supplied.)

Thus, under the Code and applicable regulations, section 337 of the Code is not available to a collapsible corporation defined in section 341(b) of the Code even though section 341(a) of the Code would not apply to gain realized by the shareholders of the corporation because of the limitations of section 341(d) of the Code.

Where, however, the requirements of section 341(e)(4) of the Code have been complied with, a corporation meeting the definition of a collapsible corporation in section 341(b) of the Code may be entitled to the nonrecognition treatment accorded by section 337 of the Code to sales of corporate property in connection with certain liquidations. Section 341(e)(4) provides in explicit terms that, for purposes of section 337, a corporation shall not be considered to be a collapsible corporation with respect to specified sales or exchanges of property.

The provisions of section 341(e) of the Code were enacted as part of the Technical Amendments Act of 1958 and subsequent to the publication of Revenue Ruling 58-241. For the effective date of section 341(e)(4) of the Code see section 20(b) of the Technical Amendments Act of 1958 (72 Stat. 1606, 1620), C.B. 1958-3, 254, at 268.

Accordingly, except to the extent section 341(e)(4) of the Code is applicable, the nonrecognition treatment of section 337 of the Code is not available to a corporation meeting the definition of a collapsible corporation in section 341(b) of the Code.

Revenue Ruling 58-241, C.B. 1958-1, 179, is hereby distinguished.