Internal Revenue Service
Revenue Ruling
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smRev. Rul. 70-93
1970-1 C.B. 71
Sec. 341
IRS Headnote
Where a taxpayer realizes gain upon liquidation of a collapsible corporation and receipt of its property, the portion of the gain attributable to property which was fully constructed more than three years before such realization is computed under section 1.341-4(c)(2) of the regulations.
Full Text
Rev. Rul. 70-93
Advice has been requested concerning the computation of the amount of gain that is not subject to section 341(a) of the Internal Revenue Code of 1954 by reason of the limitation contained in section 341(d)(3) of the Code under the circumstances described below.
In 1964, the taxpayer, an individual, formed X corporation and contributed 200x dollars in exchange for all of the stock thereof. X expended 10x dollars to satisfy organizational expenses, purchased land for 40x dollars, and had an apartment building constructed thereon at a cost of 50x dollars (project No. 1). Such construction was completed on June 30, 1965. In January 1966, X purchased a piece of land in another part of town for 45x dollars and had an apartment building constructed thereon at a cost of 55x dollars (project No. 2). Such construction was completed on March 24, 1967. Both of these projects were held by X for the production of rental income. On May 5, 1969, the taxpayer completely liquidated X and received all of X's property (consisting only of projects No. 1 and No. 2) upon such liquidation. At the time of liquidation, X had not realized a substantial part of the gain to be derived from the projects. The fair market value of project No. 1 at the date of distribution was 150x dollars. The fair market value of project No. 2 at the date of distribution was 240x dollars. The taxpayer's adjusted basis in the X stock at the date of distribution was 200x dollars. Thus, the total gain realized by the taxpayer from the distribution is 190x dollars (the amount realized upon receipt of projects No. 1 and No. 2, 150x dollars and 240x dollars, respectively, less the adjusted basis of the X stock, 200x dollars).
Section 341(a) of the Code provides, in part, as follows:
* * * Gain from a * * * distribution * * * in complete liquidation of a collapsible corporation, * * * to the extent that it would be considered (but for the provisions of this section) as gain from the sale or exchange of a capital asset held for more than 6 months shall, except as otherwise provided in this section, be considered as gain from the sale or exchange of property which is not a capital asset.
The definition of a collapsible corporation contained in section 341(b)(1) of the Code includes the following:
* * * a corporation formed or availed of principally for the * * * construction * * * of property * * * with a view to--
(A) * * * a distribution to its shareholders * * * before the realization by the corporation * * * constructing * * * the property of a substantial part of the taxable income to be derived from such property, and
(B) the realization by such shareholders of gain attributable to such property.
Section 341(d) of the Code provides, in part, as follows:
LIMITATIONS ON APPLICATION OF SECTION.--In the case of gain realized by a shareholder with respect to his stock in a collapsible corporation, this section shall not apply--
* * * * *
(3) to gain realized after the expiration of 3 years following the completion of such * * * construction * * *.
In the instant case, since project No. 1 was completed more than three years before the liquidation, that portion of the total gain realized by the taxpayer upon the distribution attributable to project No. 1 is not subject to section 341(a) of the Code by reason of the limitation contained in section 341(d)(3) of the Code.
Neither section 341(d)(3) nor the Income Tax Regulations thereunder specify how to compute the portion of the total gain of a shareholder that is attributable to property the construction of which was completed more than three years prior to such realization of gain by the shareholder. However, section 1.341-4(c)(2) of the regulations contains rules for determining, pursuant to section 341(d)(2) of the Code, whether more than 70 percent of the gain realized by a shareholder with respect to his stock in a collapsible corporation is attributable to property described in section 341(b)(1) of the Code (property manufactured, constructed, produced or purchased); if more than 70 percent is so attributable, all of the gain realized by the shareholder is subject to section 341(a) of the Code. Under these rules, the gain realized by the shareholder that is attributable to the property not described in section 341(b)(1) of the Code is determined as though the collapsible corporation had not manufactured, constructed, produced or purchased property described in section 341(b)(1) of the Code.
While the "70 percent" rule of section 341(d)(2) of the Code and the "three year" rule of section 341(d)(3) of the Code are separate limitations, they both are concerned with determining the realized and/or recognized gain of the shareholder attributable to property described in section 341(b)(1) of the Code and to certain property not described therein. Thus, it is held that for the purpose of determining the portion of the realized gain of a shareholder attributable to property the construction of which was completed more than three years prior to such realization of gain by the shareholder, such determination is to be made in accordance with the principles of section 1.341-4(c)(2) of the regulations. That is, that portion of the total gain realized attributable to the property construction of which was completed more than three years prior to such realization of gain by the shareholders is determined as though the collapsible corporation had not manufactured, constructed, produced or purchased any other property.
In the instant case, the recognized gain to the taxpayer if project No. 2 had not been undertaken would be 50x dollars (the fair market value of project No. 1 at the date of distribution, 150x dollars, plus the amount expended by the taxpayer for project No. 2, 100x dollars, less the taxpayer's adjusted basis in the stock of X, 200x dollars). Accordingly, 50x dollars of the taxpayer's total gain is not subject to section 341(a) of the Code, and the remaining 140x dollars of the taxpayer's total gain is subject to section 341(a) of the Code.