Rev. Rul. 76-279

Advice has been requested whether the distributions in the situations described below, which situations are variations of Rev. Rul. 71-250, 1971-1 C.B. 112, qualify as distributions in partial liquidation under section 346(a)(2) of the Internal Revenue Code of 1954.

In Rev. Rul. 71-250 a corporation that owned and operated three television stations sold one of the stations in July 1970 for 6,000x dollars, realizing net proceeds of 4,500x dollars after expenses and taxes on the sale. The sales proceeds were transferred to a special custodian account at a bank to preserve the funds until a decision could be made as to their use. The bank invested the funds in publicly traded stocks and United States Treasury bills. The corporation considered purchasing other stations with the sales proceeds but no satisfactory arrangement could be consummated. Instead, in December 1970, the corporation adopted a plan of partial liquidation to distribute the funds from the custodian account. Each investment was sold or redeemed at a gain in December 1970, the corporation deriving 200x dollars of gross income.

Under the plan of partial liquidation, the 4,700x dollars of funds from the custodian account were distributed pro rata to the corporation's shareholders in February 1971, in redemption of part of its stock. On these facts, the Internal Revenue Service concluded that the 4,500x dollars was a distribution in partial liquidation under section 346(a)(2) of the Code and 200x dollars was a distribution under section 301.

Situation 1

The facts are the same as in Rev. Rul. 71-250, except that each of the temporary investments resulted in a loss, the total losses being 10x dollars, and 4,500x dollars were distributed pro rata to the corporation's shareholders in February 1971, in redemption of part of its stock.

Situation 2

The facts are the same as in Rev. Rul. 71-250, except that one investment of 3,000x dollars of the proceeds resulted in a loss of 40x dollars, another investment of 1,500x dollars of the proceeds resulted in a profit of 460x dollars, and 4,920x dollars were distributed pro rata to the corporation's shareholders in February 1971, in redemption of part of its stock.

If a corporate distribution qualifies as a partial liquidation as defined in section 346 of the Code, section 331(a)(2) provides that the amounts distributed to shareholders will be treated as in payment for the stock surrendered. Section 346(a)(2) provides that a distribution will be treated as in partial liquidation of a corporation if it 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 in which the plan is adopted or within the succeeding taxable year. Section 1.346-1(a)(2) of the Income Tax Regulations provides that if a distribution results from a genuine contraction of the distributing corporation's business, such distribution will qualify as a partial liquidation. On the other hand, the regulation further provides that a distribution of funds accumulated for a planned but abandoned expansion program will not constitute a partial liquidation.

Under section 302(d) a distribution in redemption of stock not in partial liquidation generally is treated as a distribution of property to which section 301 applies if the distribution is not within the provisions of section 302(b). Section 302(b) embraces redemptions not essentially equivalent to dividends, substantially disproportionate as to the shareholder, in termination of shareholder's interest, or of stock issued by a railroad corporation in reorganization.

In situation 1 the maximum amount distributable in partial liquidation is 4,490x dollars. Only this amount remaining in the special account is attributable to the genuine contraction of the corporation's business, that is, the sale of the television station. The excess distribution of 10x dollars is attributable to the other noncontracted portions of the taxpayer's business and, since it does not come within the provisions of section 302(b) of the Code, will be treated as a distribution under section 301. See section 1.302-2(b) of the regulations, relating to pro rata redemptions.

In situation 2 the maximum amount distributable in partial liquidation is 4,460x dollars, the sales proceeds minus the investment loss. Again, only this amount is attributable to the genuine contraction of the corporation's business. The excess distribution of 460x dollars is attributable to investment gains on the special account, which Rev. Rul. 71-250 provides is not a distribution in partial liquidation, or is attributable to the other noncontracted segments of the taxpayer's business. Since the 460x dollars does not come within the provisions of section 302(b) of the Code, it will be treated as a distribution under section 301. See section 1.302-2(b) of the regulations, relating to pro rata redemptions.

Rev. Rul. 71-250 is amplified.