Section 333: The Repealed One-Month Liquidation Rule

Internal Revenue Code (IRC) Section 333 was a provision that offered a unique method for liquidating a corporation. Formally repealed by the Tax Reform Act of 1986, its purpose was to allow shareholders to receive property from a dissolving corporation with limited immediate tax consequences. Understanding this former law provides context for the double-taxation system that defines corporate liquidations today.

The Historical One-Month Liquidation Rule

Former Section 333 provided an elective relief measure for shareholders during a corporate dissolution, but its application was narrow. To use the provision, a shareholder had to be a “qualified electing shareholder,” a status achieved by filing a formal election with the IRS within 30 days of the liquidation plan’s adoption. The operational constraint was that the complete distribution of all corporate assets had to occur within one calendar month.

The rule had a distinct treatment for shareholder gain. For a noncorporate shareholder, any realized gain was recognized as ordinary dividend income up to their share of the corporation’s accumulated earnings and profits (E&P). If the shareholder’s gain exceeded their portion of E&P, the tax treatment then depended on the other assets received.

Any remaining gain was recognized as a capital gain, but only to the extent that the cash and fair market value of stock or securities acquired by the corporation after December 31, 1953, exceeded the shareholder’s E&P share. The rule deferred recognition of gain embedded in any other distributed property, such as real estate or equipment, until the shareholder later disposed of those assets.

The treatment for qualified electing corporate shareholders was simpler. A corporate shareholder recognized its gain as a capital gain, limited to the greater of its share of the liquidating corporation’s E&P or the value of the money and stock or securities it received. This structure prevented corporations from using a Section 333 liquidation to absorb a subsidiary’s E&P tax-free.

Corporate-Level Tax Treatment Under Former Law

While shareholders faced complex recognition rules, the tax treatment for the liquidating corporation was straightforward under the old regime. The prevailing legal standard was the General Utilities doctrine. This doctrine established that a corporation generally did not recognize gain or loss when distributing appreciated assets to its shareholders in a complete liquidation.

This non-recognition at the corporate level was a feature of pre-1986 tax law and a benefit of a Section 333 liquidation, as it allowed the transfer of assets without an immediate corporate tax. This meant only a single layer of tax was imposed on the transaction, borne entirely by the shareholders according to their specific gain recognition rules.

The rationale was that the liquidation was a dissolution of the corporate form, not a sale of its assets. This approach allowed value built up within a corporation to be passed to its owners without being taxed at the entity level. The repeal of this doctrine marked a change in how the U.S. tax system treats corporate asset appreciation.

Repeal and Transition to Current Law

The Tax Reform Act of 1986 repealed Section 333 as part of a larger objective: eliminating the General Utilities doctrine. Congress viewed the doctrine as an unwarranted tax benefit. The legislative goal was to ensure a corporation’s built-in gains were subject to tax when the corporation liquidated and distributed its property.

This policy shift fortified the double-taxation system for corporate structures, where income is taxed at the corporate level and again at the shareholder level upon distribution. The General Utilities rule was an exception for liquidating distributions, which the 1986 Act closed. As part of this overhaul, Section 333 was repealed. By requiring gain recognition at the corporate level, the special shareholder relief under Section 333 became inconsistent with the new policy.

Modern Corporate Liquidation Rules

Today, corporate liquidations are governed by rules reflecting the post-1986 framework. IRC Section 336 dictates the tax consequences for the liquidating corporation. Under this section, a corporation is treated as if it sold all of its assets at fair market value, forcing it to recognize any built-in gains or losses.

This rule ensures that the appreciation of corporate property is taxed at the entity level before the assets are distributed. The tax liability from this deemed sale is paid by the corporation before its final dissolution, which reduces the net assets available for shareholders.

At the shareholder level, IRC Section 331 governs the rules. This section treats amounts received by a shareholder in a complete liquidation as full payment in exchange for their stock. Shareholders must calculate their gain or loss by subtracting their stock’s adjusted basis from the fair market value of the property and cash received. This gain or loss is typically a capital gain or loss.