Rev. Rul. 74-430

Advice has been requested whether, under the circumstances described below, gain is recognized to a corporation under section 311(d)(1) of the Internal Revenue Code of 1954.

Corporation X had outstanding 8x shares of common stock. A and his brother, B, each owned 4x shares for many years. A died and his estate became the owner of A's 4x shares. Neither B nor any member of his family was a beneficiary of A's estate. Three months after A's death, X redeemed all of its stock held by A's estate using appreciated property in payment therefor.

Section 1.303-2(g) of the Income Tax Regulations states that section 303 of the Code applies to any distribution in redemption of stock without regard to whether such distribution would be treated as a dividend were it not for section 303. The provisions of section 303 of the Code, therefore, applied to the redemption of 2x shares inasmuch as that stock was included in determining the gross estate of A and the value of the property distributed for those 2x shares did not exceed the sum of the death taxes and funeral and administrative expenses, and the percentage requirements of section 303(b)(2) were met. At the same time section 302(b)(3) applied to the redemption of all 4x shares held by A's estate because the redemption terminated the estate's interest in X. Thus, section 302(b)(3) applied in whole and section 303(a) applied in part to the redemption of the X stock held by A's estate.

Section 311(a) of the Code provides, in part, that no gain or loss will be recognized to a corporation on the distribution, with respect to its stock, of property, except as provided in sections 311(b), 311(c), and 311(d). Under section 311(d)(1), gain is recognized to a corporation upon a distribution of appreciated property (property the fair market value of which exceeds its adjusted basis in the hands of the distributing corporation) in redemption of its stock. Section 311(d)(1), however, does not apply where, as provided by section 311(d)(2)(A), a distribution is in complete redemption of all of the stock of the shareholder who, at all times within the twelve-month period ending on the date of distribution, owns at least 10 percent in value of the outstanding stock of the corporation, but only if the redemption qualifies under section 302(b)(3). Under section 311(d)(2)(E), section 311(d)(1) also does not apply to a distribution to the extent that section 303(a) applies to the distribution, and, therefore, no gain is recognized to X under section 311(d)(1) with regard to the property distributed to which section 303(a) applies.

The question presented is whether section 311(d)(1) of the Code is applicable to the distribution by X of the remaining property.

Section 1.311-2(b)(2) of the Income Tax Regulations provides, in part, that for the purposes of the twelve-month ownership requirement of section 311(d)(2)(A) of the Code, a shareholder will be considered to have owned stock during the period he is considered to have held the stock by reason of the application of section 1223. Section 1223 of the Code relates to the determination of the period for which capital assets are held for purposes of classifying gains or losses upon the sale or exchange of such assets as "long-term" or "short-term" capital gains or losses as these terms are defined in section 1222.

In the instant case, section 1223(11) of the Code is applicable in determining the period for which the estate held the X stock redeemed by X. Unlike the other provisions of section 1223, which concern, generally, the holding period of property received in an exchange, or deemed exchange, for other property, section 1223(11) does not provide that the period for which the taxpayer holds the property received in an exchange includes the period the taxpayer held the property exchanged therefor. That is, section 1223(11), does not "tack on" the period that A held the stock to the period that the estate held the stock for purposes of determining how long the estate held the stock. Rather, section 1223(11) provides, in pertinent part, that if a person (A's estate) acquires property from a decedent (A), and the property is sold or otherwise disposed of by such person within six months after the decedent's death, then that person will be considered to have held the property for more than six months.

Therefore, under section 1223(11) of the Code, the estate is considered to have held the X stock redeemed for more than six months, even though it actually held the stock for three months. However, even by the application of section 1223(11), the estate did not hold the stock for the twelve-month period ending on the date of the distribution within the meaning of section 311(d)(2)(A).

Accordingly, gain is recognized to X under section 311(d)(1) of the Code to the extent that the fair market value of the property distributed in payment for 2x shares of its stock exceeds the adjusted basis to X of such property.