Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 67-16

1967-1 C.B. 77

Sec. 301

Sec. 346

IRS Headnote

Where certain amounts representing proceeds from the condemnation of property are distributed in redemption of stock of a corporation, such distribution does not qualify as a partial liquidation within the meaning of section 346(a)(2) of the Internal Revenue Code of 1954, where the condemnation did not result in a current decrease in the corporate business and the corporation can continue for a considerable period of time its operations to the same extent maintained prior to the condemnation. Since the corporation had accumulated earnings and profits in excess of the amount distributed, the entire amount of the pro rata distribution is taxable as a dividend under section 301 of the Code.

Full Text

Rev. Rul. 67-16

Advice has been requested whether a distribution under the circumstances described below qualifies as a partial liquidation within the meaning of section 346(a)(2) of the Internal Revenue Code of 1954.

A corporation has been engaged in the business of quarrying limestone and manufacturing various lime products. In 1962 land containing about one-half of its proven limestone reserves was taken by a state agency in a condemnation proceeding. The reduction in the corporation's usable reserves did not cause an immediate curtailment of its business activity. During the years 1963 through 1965 its production continued at the same or greater rate as during the years 1960 through 1962. Based on the amount of limestone quarried during the period 1960 through 1965, the remaining usable limestone reserve is sufficient to allow the corporation to maintain its present rate of production for another 18 to 27 years beyond the year 1965.

The corporation in 1965 received 4,500 x dollars as compensation for the taking of the land. Of this amount, 750 x dollars was invested in facilities for the manufacture of a lime product not previously manufactured by it, and 1,000 x dollars was set aside for further diversifecation or for acquisition of additional limestone reserves. Pursuant to a plan adopted in 1965 the corporation distributed in that year the remaining 2,000 x dollars (after reserving 750 x dollars for taxes) to its shareholders, pro rata, in redemption of a part of the only class of stock outstanding. At the time of redemption, the corporation had accumulated earnings and profits in excess of the amount of the distribution.

Section 346(a)(2) of the Code provides in part that a distribution shall 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) of the Income Tax Regulations provides that a distribution which will qualify as a distribution in partial liquidation of a corporation under section 346(a)(2) of the Code is one which results from a genuine contraction of the corporate business, such as the distribution of unused insurance proceeds recovered as a result of a fire which destroyed part of the business causing a cessation of a part of its activities.

Under the foregoing facts, the entire distribution consisted of a part of the proceeds from the condemnation award. However, the condemnation did not cause any current cessation of business activity; the corporation can continue its operations to the same extent maintained prior to the condemnation for a considerable period of time; and there is no present plan to contract the operation of the business activities presently carried on. Accordingly, the distribution did not result from a genuine contraction of the corporate business. Therefore, the distribution does not qualify as a partial liquidation under section 346(a)(2) of the Code. Since section 346(a) of the Code is inapplicable and the distribution does not qualify under section 302(a) of the Code, as payment in exchange for the stock redeemed, the distribution by virtue of section 302(d) of the Code is treated as a distribution of property to which section 301 of the Code applies. Since the corporation had accumulated earnings and profits in excess of the amount distributed, the entire amount of the distribution to each shareholder is taxable as a dividend under the provisions of section 301 of the Code.