Income Tax: Corporate Distribution–Tax Benefit Rule Does Not Qualify the Explicit Nonrecognition of Gain Provision of Section 337–Anders v. Commissioner
D. B. Anders was the sole stockholder of D. B. Anders, Inc., an industrial service concern which rented supplies of laundered apparel, coveralls, towels, and related textiles. In May 1961, the corporation adopted a plan of complete liquidation and within twelve months sold substantially all of its operating assets, including the rental items, to another corporation which intended to carry on the same type of business. Of the gain from that sale, $233,000 was allocated to the rental items, the entire cost of which had been deducted by the company in the year of purchase as an ordinary and necessary business expense. In its income tax return for the taxable year ending July 31, 1961, the corporation reported a gain of $446,601.89 from the sale of its assets but claimed nonrecognition of the entire amount pursuant to section 337 of the Internal Revenue Code of 1954 (Code). That section provides that if a corporation adopts a plan of complete liquidation, and if it distributes all of its assets within twelve months from the date of the adoption of the plan, it shall recognize no gain or loss from the sale or exchange of property within that twelve month period. The Commissioner of Internal Revenue conceded the applicability of section 337 but contended that since the $233,000 gain allocated to rental items represented the recovery of a previously deducted amount, that amount was taxable under the tax benefit rule. The Tax Court, however, held that the entire gain qualified for nonrecognition under section 337. It stated that when a corporation realizes gain from the liquidation sale of assets the cost of which had been previously deducted by the corporation, the tax benefit rule does not operate as a limitation on the explicit nonrecognition provision of section 337.