as ordinary income to the corporation disposing of the property, it is taxable to shareholders of a foreign corporation upon liquidation notwithstanding the provisions of Section 1248(d)(2).
In general, Section 1248 provides that when a United States person receives a liquidating distribution from a controlled foreign corporation, which distribution is considered to be made in exchange for stock under Section 331 of the Code, then the gain recognized by the shareholder (subject to certain limitations) shall be taxed as a dividend to the extent of the earnings and profits of the foreign corporation accumulated after December 31, 1962.
Section 1248(c) of the Code provides that for purposes of Section 1248 corporate "earnings and profits . . . shall be determined according to the rules substantially similar to those applicable to domestic corporations. . . . ." Section 1248(d) provides ". . . the following amounts shall be excluded . . . from the earnings and profits of a foreign corporation . . . (2) . . . earnings and profits of the foreign corporation attributable . . . to any net gain from the sale or exchange of property."
On the basis of this latter section of the Code, the plaintiffs and other shareholders of Numar excluded from Numar's accumulated earnings and profits the entire gain realized from the sale of Numar's assets to United.
The issue then is to reconcile Code Section 1248(d)(2) applying only to a twelve month liquidation of foreign corporations with Section 1245(a), which is applicable "notwithstanding any other provision of this subtitle."
One court, in construing these two provisions of the Code against the same factual background, concluded that Section 1245 "overrides" Section 1248(d)(2) and held that the excess depreciation is taxable as ordinary income to the shareholder of Numar. Pielemeier et al. v. United States of America, 74-2 U.S. Tax Cas. (CCH) P9599, 34 A.F.T.R.2d (P-H) 5556, Nos. 72-3082 and 73-2013 (C.D. Cal. 1974).
The rationale of that decision is that Section 1245 does not make a distinction between domestic corporations and foreign corporations and, therefore, it is applicable to both. I do not agree. Section 1245(a) requires recognition to the corporation of recaptured depreciation. Thus this Section deals solely with the person who disposes of depreciable property. Since a foreign corporation is not taxable, Section 1245(a) can have no bearing on the manner in which the foreign corporation treats gain on the sale of depreciable assets.
But the Government argues, since Section 1248(d)(2) refers to Section 337(a) relating to a twelve month liquidation of a domestic corporation and since Section 1245(a) is admittedly a limitation on the benefits conferred by Section 337(a), it follows that Section 1245(a) also limits the benefits conferred by Section 1248(d)(2). Here again, both Sections 337(a) and 1245(a) deals with the recognition of gain to the corporation and not with the computation of the earnings and profits taxable to a shareholder upon liquidation.
The language of Section 1248(c)(1) providing that the earnings and profits of a foreign corporation ". . . shall be determined according to rules substantially similar to those applicable to domestic corporations . . ." does not strengthen the defendants' position because the unambiguous language of the following - Section 1248(d) -- clearly allows exceptions to the general rule by enumerating specific items of income and gain which are to be excluded from earnings and profits.
I conclude that Section 1245(a) dealing with a manner in which a domestic corporation shall treat gain from the sale of depreciable property does not negate or limit the explicit language of Section 1248(d)(2) which authorizes a shareholder of a foreign corporation, upon liquidation, to exclude from earnings and profits any net gain from the sale or exchange of property.
If Congress meant 1245(a) to apply to foreign corporations and thus operate as an exclusion to the exclusion of 1248(d)(2), it would have tailored the language for a more suitable fit. Appendix
Internal Revenue Code of 1954 (26 U.S.C.):
SEC. 1248. GAIN FROM CERTAIN SALES OR EXCHANGES OF STOCK IN CERTAIN FOREIGN CORPORATIONS.
(a) General Rule. -- If --