[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: 26CFR1.346-1]

[Page 179-180]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.346-1  Partial liquidation.

    (a) General. This section defines a partial liquidation. If amounts 
are distributed in partial liquidation such amounts are treated under 
section 331(a)(2) as received in part or full payment in exchange for 
the stock. A distribution is treated as in partial liquidation of a 
corporation if:
    (1) The distribution is one of a series of distributions in 
redemption of all of the stock of the corporation pursuant to a plan of 
complete liquidation, or
    (2) The distribution:
    (i) Is not essentially equivalent to a dividend,
    (ii) Is in redemption of a part of the stock of the corporation 
pursuant to a plan, and
    (iii) Occurs within the taxable year in which the plan is adopted or 
within the succeeding taxable year.

An example of a distribution which will qualify as a partial liquidation 
under subparagraph (2) of this paragraph and section 346(a) is a 
distribution resulting 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. On the other hand, the 
distribution of funds attributable to a reserve for an expansion program 
which has been abandoned does not qualify as a partial liquidation 
within the meaning of section 346(a). A distribution to which section 
355 applies (or so much of section 356 as relates to section 355) is not 
a distribution in partial liquidation within the meaning of section 
346(a).
    (b) Special requirements on termination of business. A distribution 
which occurs within the taxable year in which the plan is adopted or 
within the succeeding taxable year and which meets the requirements of 
subsection (b) of section 346 falls within paragraph (a)(2) of this 
section and within section 346(a)(2). The requirements which a 
distribution must meet to fall within subsection (b) of section 346 are:
    (1) Such distribution is attributable to the corporation's ceasing 
to conduct, or consists of assets of, a trade or business which has been 
actively conducted throughout the five-year period immediately before 
the distribution, which trade or business was not acquired by the 
corporation within such period in a transaction in which gain or loss 
was recognized in whole or in part, and
    (2) Immediately after such distribution by the corporation it is 
actively engaged in the conduct of a trade or business, which trade or 
business was actively conducted throughout the five-year period ending 
on the date of such distribution and was not acquired by the corporation 
within such period in a transaction in which gain or loss was recognized 
in whole or in part.

A distribution shall be treated as having been made in partial 
liquidation pursuant to section 346(b) if it consists of the proceeds of 
the sale of the assets of a trade or business which has been actively 
conducted for the five-year period and has been terminated, or if it is 
a distribution in kind of the assets of such a business, or if it is a 
distribution in kind of some of the assets of such a business and of the 
proceeds of the sale of the remainder of the assets of such a business. 
In general, a distribution which will qualify under section 346(b) may 
consist of, but is not limited to:
    (i) Assets (other than inventory or property described in 
subdivision (ii) of this subparagraph) used in the trade or business 
throughout the five-year period immediately before the distribution (for 
this purpose an asset shall be considered used in the trade or business 
during the period of time the asset which it replaced was so used), or
    (ii) Proceeds from the sale of assets described in subdivision (i) 
of this subparagraph, and, in addition,
    (iii) The inventory of such trade or business or property held 
primarily for sale to customers in the ordinary course of business, if:

[[Page 180]]

    (a) The items constituting such inventory or such property were 
substantially similar to the items constituting such inventory or 
property during the five-year period immediately before the 
distribution, and
    (b) The quantity of such items on the date of distribution was not 
substantially in excess of the quantity of similar items regularly on 
hand in the conduct of such business during such five-year period, or
    (iv) Proceeds from the sale of inventory or property described in 
subdivision (iii) of this subparagraph, if such inventory or property is 
sold in bulk in the course of termination of such trade or business and 
if with respect to such inventory the conditions of subdivision (iii)(a) 
and (b) of this subparagraph would have been met had such inventory or 
property been distributed on the date of such sale.
    (c) Active conduct of a trade or business. For the purpose of 
section 346(b)(1), a corporation shall be deemed to have actively 
conducted a trade or business immediately before the distribution, if:
    (1) In the case of a business the assets of which have been 
distributed in kind, the business was operated by such corporation until 
the date of distribution, or
    (2) In the case of a business the proceeds of the sale of the assets 
of which are distributed, such business was actively conducted until the 
date of sale and the proceeds of such sale were distributed as soon 
thereafter as reasonably possible.

The term active conduct of a trade or business shall have the same 
meaning in this section as in paragraph (c) of Sec. 1.355-1.