Corporate Liquidating Distributions

1
Chapter 6

• Corporate Liquidating Distributions

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Complete Liquidation

• Complete liquidation is not defined but must
  either
• completely cancel or redeem all of a
  corporations stock in accordance with a plan of
  liquidation or
• be one of a series of distributions in accordance
  with a plan of liquidation.

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Liquidation Status

• Corporation ceases to be a going concern.
• Activities are for the purpose of winding up its
  affairs, paying its debts, and distributing any
  remaining property to shareholders.
• Retention of nominal assets does not alter the
  liquidation status.

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Dissolution of the Corporation

• Dissolution is a legal action that requires the
  corporation to surrender its charter to the
  state.
• It is possible to liquidate a corporation but
  never dissolve it.
• Dissolution frees the corporate name for use by
  others.

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General Liquidation Rules

• General liquidation rules are divided into two
  parts
• the effects of liquidation on the shareholders
  and
• the effects of liquidation on the corporation

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Effects of Liquidation on Shareholders

• Amount of recognized gain or loss
• Character of gain or loss
• Basis of property received by shareholder

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Amount of Recognized Gain or Loss

• To shareholder 331
• Gain or loss recognized on receipt of property
  from liquidating corporation
• Amount FMV of property received - basis in
  stock Shareholder is assumed to have sold the
  stock for the amount received.
• Gain or loss is determined by comparing FMV of
  assets received, minus liabilities assumed, to
  the basis of the stock surrendered.

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Character of Gain or Loss

• Usually the stock is a capital asset, and the
  gain or loss is treated as a capital transaction.
• Sec. 1244 stock receives ordinary loss treatment.
• Losses sustained by a parent in a worthless stock
  investment in a controlled subsidiary receive
  ordinary loss treatment.

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Basis of Property Received

• Under the general liquidation rules, the basis of
  property received is the FMV on the distribution
  date.
• The holding period starts on the day after the
  distribution date.

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Effects of Liquidation on the Liquidating
Corporation

• Recognition of gains or losses
• Liabilities assumed by shareholders
• Exceptions to the general rules

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Recognition of Gains or Losses

• General rule
• Both gains and losses are recognized
• Tax attributes disappear

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Consequences of Liquidation(slide 2 of 2)

• To liquidating corporation 336
• Gain or loss is recognized by corporation on
  distribution or sale of property (loss may be
  disallowed or limited)
• Amount FMV of property distributed - basis in
  property
• exception If liability assumed, FMV treated as
  not less that liability
• Result
• Liquidating distribution subject to corporate
  level tax (gain), and shareholder level tax
  (receipt of proceeds)

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Liabilities Assumed or Acquired

• The general rule is that distributed assets are
  valued at fair market value.
• When a liability is assumed by the shareholder,
  the FMV of the related asset cannot be less than
  the amount of the liability assumed or acquired.

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Exceptions to the General Rule

• Related party rule
• No loss is recognized unless
• Prorated distribution of loss property
• Property was NOT acquired by capital contribution
  or under Sec. 351 within the past five years
• Gain is recognized

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Exceptions to the General Rule

• Tax-avoidance purpose
• If the primary purpose of the transfer of
  property and subsequent liquidation was to
  produce losses to offset gains from the
  liquidation of other property, the losses are
  disallowed.

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Liquidation of a Controlled Subsidiary

• Requirements
• Effects of liquidating on the shareholders
• Effects of liquidating on the subsidiary
  corporation

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Requirements for Liquidation of a Subsidiary into
a Parent

• Parent must own at least 80of voting power and
  value of stock.
• There must be a complete cancellation or
  redemption of the subsidiarys stock.
• Distribution must occur in a single tax year or
  qualify as one of a series of distributions that
  are completed within three years after the year
  of the first distribution.

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Other Requirements

• Subsidiary must be solvent
• Does not apply to minority stockholders
• Sec. 332(a) does not apply if parent receives a
  payment to satisfy the subsidiarys indebtedness
  to the parent

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Effects on the Parent/Shareholder

• Parent corporation recognizes no gain or loss
  when an 80 controlled subsidiary corporation is
  liquidated into the parent corporation Sec. 332
• If a controlled subsidiary is liquidated into the
  parent, the tax attributes carry over to the
  parent Sec. 381(a)

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Types of Tax Attributes

• Potential for depreciation recapture
• NOL carryovers
• Earnings and profits balance
• Capital loss carryovers
• General business and other tax credits

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Effects on the Liquidated Subsidiary

• Special rule for controlled subsidiary
• There is no gain or loss recognized when a
  controlled subsidiary transfers its assets and
  liabilities to a parent corporation. Sec.
  337(a)
• The liquidating subsidiary recognizes no loss
  when it transfers assets to minority
  shareholders. Sec. 336(d)(3)
• However, it does recognize gains.

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Effects of Minority Shareholders

• Liquidating distributions made to minority
  shareholders are taxed under Sec. 331 general
  liquidation rules
• Minority shareholders recognize gain or loss
  (generally capital)

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338 ElectionCertain Stock Purchases Treated as
Asset Acquisitions

• Parent corporation can elect to treat the
  acquisition of stock in sub as a purchase of
  subs assets
• parent has a basis in subs assets equal to its
  basis in subs stock
• sub is treated as having sold all of its assets
  at FMV at close of acquisition date, then treated
  as a new corporation that purchased all the
  assets the next day

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338 ElectionCertain Stock Purchases Treated as
Asset Acquisitions

• Allocation of purchase price by residual method
  according to FMV in order
• I - Cash, demand accounts, etc.
• II - Marketable securities
• III - Tangible and intangible (not I,II,IV)
• IV - Sec. 197 intangibles other than goodwill
• V - Goodwill
• No carry over holding period or attributes (NOL,
  credits, EP, etc.)