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FEDERAL INCOME, ESTATE & GIFT TAX PROJECT i (PRELIMINARY DRAFT 198B, May 21, 1956)

handle is hein.ali/aliftp0206 and id is 1 raw text is: Introductory In view of the rather lengthy comments necessary to' ,p1l.i the tech- nical operations of the proposed statute an attempt will be made in this intro- duction to present a bird's-eye view of the operation as a whole. Une reason for the bulk of the comments is that two alternatives are presented for treat- ing non-aliquot distributions on complete liquidation of corporations of limited ownership whose section 2 assets have increased significantly in value. Alter- native II represents the treatment recommended by the American Law Institute in this situation and is complex. Alternative I gives a simpler though not quite as just treatment in this case. In the interest of brevity, and since Alternative I seems tentatively favored by the committee, this introduction will be written on the premise that Alternative I is to be adopted. Section I provides that, in general, complete liquidation shall be treated as a sale of stock and is in accordance with present law. The remainder of section 1 gives cross references to other sections of the proposed statute which provide for variations from the normal treatment. The first variation consists of the option given in section 3 to the shareholders of corporations of limited ownership1 not to recognize all of the gain on a complete liquidation. Under this section a snareholder can elect to recognize gain only to the extent that his pro rata portion of the aggregate basis of the corporationi's assets exceeds his stock basis (except that where money received exceeds this stock basis then gain must be recog- nized at least to the extent of that excess). This gain is capital gain. I. Corporations of limited ownership are defined in section 2(c) as corporations in which X or fewer shareholders own more than 501o of the voting stock of the corporation.

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