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shall be the fair market value of such property at the time of the distribution. (b) LIQUIDATION OF SUBSIDIARY.

(1) IN GENERAL.-If property is received by a corporation in a distribution in complete liquidation of another corporation (within the meaning of section 332 (b)), then, except as provided in paragraph (2), the basis of the property in the hands of the distributee shall be the same as it would be in the hands of the transferor. If property is received by a corporation in a transfer to which section 332 (c) applies, and if paragraph (2) of this subsection does not apply, then the basis of the property in the hands of the transferee shall be the same as it would be in the hands of the transferor.

(2) EXCEPTION.-If property is received by a corporation in a distribution in complete liquidation of another corporation (within the meaning of section 332 (b)), and if

(A) the distribution is pursuant to a plan of liquidation adopted

(i) on or after June 22, 1954, and

(ii) not more than 2 years after the date of the transaction described in subparagraph (B) (or, in the case of a series of transactions, the date of the last such transaction); and

(B) stock of the distributing corporation possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote, and at least 80 percent of the total number of shares of all other classes of stock (except nonvoting stock which is limited and preferred as to dividends), was acquired by the distributee by purchase (as defined in paragraph (3)) during a

period of not more than 12 months, then the basis of the property in the hands of the distributee shall be the adjusted basis of the stock with respect to which the distribution was made. For purposes of the preceding sentence, under regulations prescribed by the Secretary or his delegate, proper adjustment in the adjusted basis of any stock shall be made for any distribution made to the distributee with respect to such stock before the adoption of the plan of liquidation, for any money received, for any liabilities assumed or subject to which the property was received, and for other items.

(3) PURCHASE DEFINED. -For purposes of paragraph (2) (B), the term "purchase" means any acquisition of stock, but only if —

(A) the basis of the stock in the hands of the distributee is not determined (i) in whole or in part by reference to the adjusted basis of such stock in the hands of the person from whom acquired, or (i) under section 1014 (a) (relating to property acquired from a decedent),

(B) the stock is not acquired in an exchange to which section 351 applies, and

(C) the stock is not acquired from a person the ownership of whose stock would, under section 318 (a), be attributed to the person acquiring such stock.

(4) DISTRIBUTEE DEFINED.-For purposes of this subsection, the term "distributee” means only the corporation which meets the 80 percent stock ownership requirements specified in section 332 (b).

(c) PROPERTY RECEIVED IN LIQUIDATION UNDER SECTION 333.— Il

(1) property was acquired by a shareholder in the liquidation of a corporation in cancellation or redemption of stock, and (2) with respect to such acquisition

(A) gain was realized, but

(B) as the result of an election made by the shareholder under section 333, the extent to which gain was recognized was deter

mined under section 333, then the basis shall be the same as the basis of such stock cancelled or redeemed in the liquidation, decreased in the amount of any money received by the shareholder, and increased in the amount of gain recognized to him.

Subpart B-Effects on Corporation
Sec. 336. General rule.
Sec. 337. Gain or loss on sales or exchanges in connection with

certain liquidations.
Sec. 338. Effect on earnings and profits.
SEC. 336. GENERAL RULE.

Except as provided in section 453 (d) (relating to disposition of installment obligations), no gain or loss shall be recognized to a corporation on the distribution of property in partial or complete liquidation. SEC. 337. GAIN OR LOSS ON SALES OR EXCHANGES IN CONNECTION

WITH CERTAIN LIQUIDATIONS. (a) GENERAL RULE.-If

(1) a corporation adopts a plan of complete liquidation on or after June 22, 1954, and

(2) within the 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation are distributed in complete liquidation, less assets retained to meet

claims, then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property within such 12-month period. (b) PROPERTY DEFINED.

(1) IN GENERAL.- For purposes of subsection (a), the term "property” does not include

(A) stock in trade of the corporation, or other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year, and property held by the corporation primarily for sale to customers in the ordinary course of its trade or business,

(B) installment obligations acquired in respect of the sale or exchange (without regard to whether such sale or exchange occurred before, on, or after the date of the adoption of the plan referred to in subsection (a)) of stock in trade or other property described in subparagraph (A) of this paragraph, and

(C) installment obligations acquired in respect of property (other than property described in subparagraph (A)) sold or exchanged before the date of the adoption of such plan of liquidation.

(2) NONRECOGNITION WITH RESPECT TO INVENTORY IN CERTAIN CASES.-Notwithstanding paragraph (1) of this subsection, if substantially all of the property described in subparagraph (A) of such paragraph (1) which is attributable to a trade or business of the corporation is, in accordance with this section, sold or exchanged to one person in one transaction, then for purposes of subsection (a) the term "property" includes

(A) such property so sold or exchanged, and

(B) installment obligations acquired in respect of such sale or exchange. (c) LIMITATIONS.—

(1) COLLAPSĪBLE CORPORATIONS AND LIQUIDATIONS TO WHICH SECTION 333 APPLIES.—This section shall not apply to any sale or exchange

(A) made by a collapsible corporation (as defined in section 341 (b)), or

(B) following the adoption of a plan of complete liquidation, if section 333 applies with respect to such liquidation.

(2) LIQUIDATIONS TO WHICH SECTION 332 APPLIES.—In the case of a sale or exchange following the adoption of a plan of complete liquidation, if section:332 applies with respect to such liquidation, then

(A) if the basis of the property of the liquidating corporation in the hands of the distributee is determined under section 334 (b) (1), this section shall not apply; or

(B) if the basis of the property of the liquidating corporation in the hands of the distributee is determined under section 334 (b) (2), this section shall apply only to that portion (if any) of the gain which is not greater than the excess of (i) that portion of the adjusted basis (adjusted for any adjustment required under the second sentence of section 334 (b) (2)) of the stock of the liquidating corporation which is allocable, under regulations prescribed by the Secretary or his delegate, to the property sold or excbanged, over (ii) the adjusted basis, in the hands of the

liquidating corporation, of the property sold or exchanged. (d) SPECIAL RULE FOR CERTAIN MINORITY SHAREHOLDERS.-If a corporation adopts a plan of complete liquidation on or after January 1, 1958, and if subsection (a) does not apply to sales of exchanges of property by such corporation, solely by reason of the application of subsection (c) (2) (A), then for the first taxable year of any shareholder (other than a corporation which meets the 80 percent stock ownership requirement specified in section 332 (b) (1)) in which he receives a distribution in complete liquidation

(1) the amount realized by such shareholder on the distribution shall be increased by his proportionate share of the amount by which the tax imposed by this subtitle on such corporation would have been reduced if subsection (c) (2) (A) had not been applicable, and

(2) for purposes of this title, such shareholder shall be deemed to have paid, on the last day prescribed by law for the payment of the tax imposed by this subtitle on such shareholder for such taxable year, an amount of tax equal to the amount of the increase described in paragraph (1).

SEC. 338. EFFECT ON EARNINGS AND PROFITS.

For special rule relating to the effect on earnings and profits of certain distributions in partial liquidation, see section 312 (e).

Subpart C—Collapsible Corporations; Foreign Personal Holding

Companies
Sec. 341. Collapsible corporations.

Sec. 342. Liquidation of certain foreign personal holding companies. SEC. 341. COLLAPSIBLE CORPORATIONS. (a) TREATMENT OF GAIN TO SHAREHOLDERS.-Gain from(1) the sale or exchange of stock of a collapsible corporation,

(2) a distribution in partial or complete liquidation of a collapsible corporation, which distribution is treated under this part as in part or full payment in exchange for stock, and

(3) a distribution made by a collapsible corporation which, under section 301 (c)(3) (A), is treated, to the extent it exceeds the basis of the stock, in the same manner as a gain from the sale or exchange

of property 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 provided in subsection (d), be considered as gain from the sale or exchange of property which is not a capital asset. (b) DEFINITIONS.

(1) COLLAPSIBLE CORPORATION.–For purposes of this section, the term "collapsible corporation" means a corporation formed or availed of principally for the manufacture, construction, or production of property, for the purchase of property which in the hands of the corporation) is property described in paragraph (3), or for the holding of stock in a corporation so formed or availed of, with a view to

(A) the sale or exchange of stock by its shareholders (whether in liquidation or otherwise), or a distribution to its shareholders, before the realization by the corporation manufacturing, constructing, producing, or purchasing 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.

(2) PRODUCTION OR PURCHASE OF PROPERTY.-For purposes of paragraph (1), a corporation shall be deemed to have manufactured, constructed, produced, or purchased property, if

(A), it engaged in the manufacture, construction, or production of such property to any extent.

(B) it holds property having a basis determined, in whole or in part, by reference to the cost of such property in the hands of a person who manufactured, constructed, produced, or purchased the property, or

(c) it holds property having a basis determined, in whole or in part, by reference to the cost of property manufactured, constructed, produced, or purchased by the corporation.

(3) SECTION 341 ASSETS.-For purposes of this section, the term "section 341 assets” means property held for a period of less than 3 years which is

(A) stock in trade of the corporation, or other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year;

(B) property held by the corporation primarily for sale to customers in the ordinary course of its trade or business;

(C) unrealized receivables or fees, except receivables from sales of property other than property described in this paragraph; or

(D) property described in section 1231 (b) (without regard to any holding period therein provided), except such property which is or has been used in connection with the manufacture, construction, production, or sale of property described in subparagraph

(A) or (B). In determining whether the 3-year holding period specified in this paragraph has been satisfied, section 1223 shall apply, but no such period shall be deemed to begin before the completion of the manufacture, construction, production, or purchase.

(4) ÚNREALIZED RECEIVABLES. -For purposes of paragraph (3) (C), the terin "unrealized receivables or fees" means, to the extent not previously includible in income under the method of accounting used by the corporation, any rights (contractual or otherwise) to payment for

(A) goods delivered, or to be delivered, to the extent the proceeds therefrom would be treated as amounts received from the sale or exchange of property other than a capital asset, or

(B) services rendered or to be rendered. (c) PRESUMPTION IN CERTAIN Cases. —

(1) IN GENERAL.–For purposes of this section, a corporation shall, unless shown to the contrary, be deemed to be a collapsible corporation if (at the time of the sale or exchange, or the distribution, described in subsection (a)) the fair market value of its section 341 assets (as defined in subsection (b) (3)) is

(A) 50 percent or more of the fair market value of its total assets, and

(B) 120 percent or more of the adjusted basis of such section 341 assets. Absence of the conditions described in subparagraphs (A) and (B) shall not give rise to a presumption that the corporation was not a collapsible corporation.

(2) DETERMINATION OF TOTAL ASSETS.-In determining the fair market value of the total assets of a corporation for purposes of paragraph (1) (A), there shall not be taken into account

(A) cash,

(B) obligations which are capital assets in the hands of the corporation (and governmental obligations described in section 1221 (5)), and

(C) stock in any other corporation.

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