[Code of Federal Regulations]
[Title 26, Volume 4]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.331-1]

[Page 68]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.331-1  Corporate liquidations.

    (a) Section 331 contains rules governing the extent to which gain or 
loss is recognized to a shareholder receiving a distribution in complete 
or partial liquidation of a corporation. Under section 331(a)(1), it is 
provided that amounts distributed in complete liquidation of a 
corporation shall be treated as in full payment in exchange for the 
stock. Under section 331(a)(2), it is provided that amounts distributed 
in partial liquidation of a corporation shall be treated as in full or 
part payment in exchange for the stock. For this purpose, the term 
partial liquidation shall have the meaning ascribed in section 346. If 
section 331 is applicable to the distribution of property by a 
corporation, section 301 (relating to the effects on a shareholder of 
distributions of property) has no application other than to a 
distribution in complete liquidation to which section 316(b)(2)(B) 
applies. See paragraph (b)(2) of Sec. 1.316-1.
    (b) The gain or loss to a shareholder from a distribution in partial 
or complete liquidation is to be determined under section 1001 by 
comparing the amount of the distribution with the cost or other basis of 
the stock. The gain or loss will be recognized to the extent provided in 
section 1002 and will be subject to the provisions of parts I, II, and 
III (section 1201 and following), subchapter P, chapter 1 of the Code.
    (c) A liquidation which is followed by a transfer to another 
corporation of all or part of the assets of the liquidating corporation 
or which is preceded by such a transfer may, however, have the effect of 
the distribution of a dividend or of a transaction in which no loss is 
recognized and gain is recognized only to the extent of ``other 
property.'' See sections 301 and 356.
    (d) In every case in which a shareholder transfers stock in exchange 
for property to the corporation which issued such stock, the facts and 
circumstances shall be reported on his return unless the property is 
part of a distribution made pursuant to a corporate resolution reciting 
that the distribution is made in liquidation of the corporation and the 
corporation is completely liquidated and dissolved within one year after 
the distribution. See section 6043 for requirements relating to returns 
by corporations.
    (e) The provisions of this section may be illustrated by the 
following example:

    Example A, an individual who makes his income tax returns on the 
calendar year basis, owns 20 shares of stock of the P Corporation, a 
domestic corporation, 10 shares of which were acquired in 1951 at a cost 
of $1,500 and the remainder of 10 shares in December 1954 at a cost of 
$2,900. He receives in April 1955 a distribution of $250 per share in 
complete liquidation, or $2,500 on the 10 shares acquired in 1951, and 
$2,500 on the 10 shares acquired in December 1954. The gain of $1,000 on 
the shares acquired in 1951 is a long-term capital gain to be treated as 
provided in parts I, II, and III (section 1201 and following), 
subchapter P, chapter 1 of the Code. The loss of $400 on the shares 
acquired in 1954 is a short-term capital loss to be treated as provided 
in parts I, II, and III (section 1201 and following), subchapter P, 
chapter 1 of the Code.

[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6949, 33 FR 
5521, Apr. 9, 1968]

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