Rev. Rul. 55-355

Advice has been requested as to the method of determining the basis of three public utility subsidiary companies received in exchange for preferred stock of the parent public utility holding company.

The taxpayer acquired various blocks of $6 and $7 preferred stocks of a registered public utility holding company at various times and at different prices. Pursuant to a plan of liquidation of such company, approved by an order of the Securities and Exchange Commission, the taxpayer, in one transaction, surrendered all of its $6 and $7 preferred stock and received in exchange therefor common stocks of three public utility subsidiary companies of the liquidated company, plus cash dividend adjustments. The gain to the taxpayer on the exchange was not recognized except to the extent of cash received in accordance with the provisions of section 371(a) and 371(e)(1) of the Internal Revenue Code of 1939.

All the stock received by the taxpayer in the exchange was received simultaneously in one lot and was in the form of certificates representing, in each instance, 100 shares of stock, with any odd number of shares of any one of the companies being included in one certificate. There was no identification or designation as to which shares of the common stocks of the three public utility utility companies were attributable to any specific shares of the $6 or $7 preferred stock surrendered in the exchange.

The specific question presented is whether the taxpayer may compute an `average' basis for the common stock received upon the liquidation of the public utility company. It is fairly well settled that where identification is lacking, an average basis must be used for stock of another corporation received in a nontaxable exchange pursuant to a reorganization under section 112(g)(1) of the Code of 1939. See Lyde R. Arrott v. Commissioner , United States Board of Tax Appeals Memorandum Opinion, entered June 19, 1942, affirmed, 136 Fed.(2d) 449 and Christian W. Von Gunten v. Commissioner , 28 B.T.A. 702, affirmed, 76 Fed.(2d) 670. In the instant case, although the stock was not acquired in a nontaxable exchange pursuant to a reorganization under section 112(g)(1) of the Code, the stock was acquired in a tax-free exchange as a result of a liquidating distribution under the provisions of section 371 of the Code.

Accordingly, it is held that the tax basis of the shares of common stock received in the exchange should be determined by aggregating into one figure the respective bases of the various lots of the $6 and $7 preferred stock exchanged and, after appropriate adjustments, under section 372(a) of the Code, for cash received and gain recognized, allocating such figure to the common stocks in proportion to the total fair market value of the shares of each corporation on the effective date of the exchange. The amount thus allocated to the common stock of each company will be divided by the total number of shares of that company acquired in the exchange so that the basis of each share will be an `average' basis