Tax 4022/5022 Tax 4022/5022 Federal Income Tax II Federal Income Tax II

Chapter 20Chapter 20Dr. Robert R. Oliva

Professor and ChairpersonDepartment of Accounting

University of Arkansas at Little Rock

CORPORATE LIQUIDATIONSCORPORATE LIQUIDATIONS

I. Liquidating a free-standing corporation II. Liquidating a subsidiary

I. Liquidating a free-standing I. Liquidating a free-standing corporationcorporation

LIQUIDATIONS: IRC 331/336LIQUIDATIONS: IRC 331/336

Was it a liquidation or something else? If a liquidation,

– General rule: IRC 331/336– One exception [IRC 336(d)(1)]:

Dont recognize loss to distributing corp if recipient is – Related and – Distributing

• Non-prorata/any property• Pro-rata/disqualified property

– One special rule [IRC 336(d)(2)]: Distributions with tax avoidance

Was it a liquidation?Was it a liquidation?

Based on interpretations. No specific plan of liquidation requirement.

– But better to have a plan because Is it a 331 or a 301 distribution? Necessary for recogniton of loss.

If a liquidation, what is the tax If a liquidation, what is the tax effect?effect?

Effect on recipients: IRC 331– “Amounts received by a shareholder in a distribution

in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock”

Effects on corporation: IRC 336 – Except as otherwise provided in this section . . . gain or

loss shall be recognized to a liquidating corporation on the distribution of property in complete liquidation as if such property was sold to the distributee at its fair market value.

DISTINGUISH: Corporate DISTINGUISH: Corporate effect: IRC 336 v. IRC 311(a) effect: IRC 336 v. IRC 311(a)

and (b)and (b) IRC 311: No gain or loss shall be

recognized by corporate distributor in IRC 301 property distributions. – Exception: recognize gain if distributing

appreciated property. IRC 336: Recognize gain or loss.

EFFECT OF DISTRIBUTING EFFECT OF DISTRIBUTING PROPERTY SUBJECT TO PROPERTY SUBJECT TO

LIABILITIES ON FMV LIABILITIES ON FMV IRC 336(b) “FMV” = NOT LESS THAN LIABILITY

THEREFORE, BARRING THEREFORE, BARRING EXCEPTIONS, TREAT AS A EXCEPTIONS, TREAT AS A

SALE SALE IRC 1001 TRANSACTION AS TO BOTH

PARTIES CAPITAL GAIN/CAPITAL LOSS

RECOGNITION

EXCEPTION AND SPECIAL EXCEPTION AND SPECIAL RULERULE

AS TO RECIPIENTS: NONE AS TO LIQUIDATING CORPORATION:

– EXCEPTION: RELATED PARTY NON-PRORATA/ANY PROPERTY PRO-RATA/DISQUALIFIED PROPERTY

– SPECIAL RULE: TAX AVOIDANCE

EFFECT OF IRC 267(a)(1): EFFECT OF IRC 267(a)(1): FIRST SENTENCEFIRST SENTENCE

“. . . NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF ANY LOSS FROM THE SALE OF EXCHANGE OF PROPERTY . . . BETWEEN PERSONS SPECIFIED IN ANY OF THE PARAGRAPHS IN SUBSECTION (b) . . . .”

EFFECT OF IRC 267(a)(1): EFFECT OF IRC 267(a)(1): SECOND SENTENCESECOND SENTENCE

THE PRECEDING SENTENCE SHALL NOT APPLY TO ANY LOSS OF THE DISTRIBUTIING CORPORATION (OR THE DISTRIBUTEE) IN THE CASE OF A DISTRIBUTION IN COMPLETE LIQUIDATION

DOES THAT MEAN THAT IRC 267 DOES NOT APPLY TO LIQUIDATING DISTRIBUTIONS?

EFFECT OF IRC 267(a)(1)’S EFFECT OF IRC 267(a)(1)’S SECOND SENTENCE ON SECOND SENTENCE ON

RECIPIENTRECIPIENT IRC 331 CONTAINS NO LIMITATIONS

OR REFERENCE TO IRC 267. THUS: 2ND SENTENCE HAS CRITICAL

EFFECT, E.G., AN EXCEPTION TO THE EXCEPTION.

ALLOWS RECIPIENTS TO RECOGNIZE LOSS EVEN IF RELATED PARTIES.

EFFECT OF IRC 267(a)(1)’S EFFECT OF IRC 267(a)(1)’S SECOND SENTENCE ON SECOND SENTENCE ON

LIQUIDATING LIQUIDATING CORPORATIONCORPORATION IF IRC 336 DID NOT CONTAIN ANY

REFERENCE TO IRC 267, THEN IRC 267(a)(1) WOULD NOT PREVENT RECOGNITON OF LOSS BY THE LIQUIDATING CORPORATION.

HOWEVER, – EXCEPTION: IRC 336(d)(1)– SPECIAL RULE: IRC 336(d)(2)

EXCEPTION [IRC 336(d)(1)]: EXCEPTION [IRC 336(d)(1)]: NO LOSS SHALL BE NO LOSS SHALL BE

RECOGNIZED RECOGNIZED TO A LIQUIDATING CORPORATION

ON THE DISTRIBUTION . . . TO A RELATED PERSON ( WITHIN THE MEANING OF SECTION 267)

IF SUCH DISTRIBUTION IS NOT PRO RATA OR (EVEN IF PRO-RATA), SUCH PROPERTY IS DISQUALIFIED PROPERTY

WHEN TO RECOGNIZE WHEN TO RECOGNIZE LOSS IF RELATED LOSS IF RELATED

RECIPIENTS?RECIPIENTS? PRO RATA DISTRIBUTION AND THE

DISTRIBUTION IS OTHER THAN “DISQUALIFIED PROPERTY”

SUMMARY OF 267(a)/336(d) SUMMARY OF 267(a)/336(d) RELATIONSHIP:RELATIONSHIP:

IRC 267 1ST SENTENCE: NO LOSS IRC 267(a)(1)’S 2ND SENTENCE: BUT OK

TO RECOGNIZE LOSS IN LIQUIDATION IRC 336(d)(1), BY ITS OWN TERMS, NO

LOSS RECOGNIZED IF RECIPIENT IS RELATED AND DISTRIBUTION IS – NON-PRORATA / ANY PROPERTY OR – PRO-RATA / “DISQUALIFIED PROPERTY”

HENCE: FOR THIS HENCE: FOR THIS EXCEPTION NEED TO EXCEPTION NEED TO

KNOW KNOW IRC 267 DEFINITION OF PRO-RATA DEFINITION OF “DISQUALIFIED

PROPERTY”

WHO’S RELATED? > 50% WHO’S RELATED? > 50% OWNERSHIPOWNERSHIP

CORPORATIONS AND INDIVIDUAL SHAREHOLDERS

CORPORATIONS IN CONTROLLED GROUP CORPORATIONS AND TRUST

SHAREHOLDERS CORPORATION AND PARTNERSHIP

SHAREHOLDERS AN S AND A C CORPORATION

INDIVIDUALS AND THEIR INDIVIDUALS AND THEIR CORPORATIONS [IRC 267(b)CORPORATIONS [IRC 267(b)

(2)](2)] MORE THAN 50% IN VALUE OF THE

OUTSTANDING STOCK OF WHICH IS OWNED, DIRECTLY OR INDIRECTLY, BY OR FOR SUCH AN INDIVIDUAL.

TWO CORPORATIONS IN TWO CORPORATIONS IN CONTROLLED GROUP [IRC CONTROLLED GROUP [IRC

267(b)(3)] 267(b)(3)] MORE THAN 50% OWNERSHIP IN

PARENT/SUB GROUP OR BROTHER/SISTER GROUP– SEE IRC 267(f) AND IRC 1563(b)

IRC 1563 HAS ITS OWN SET OF ATRIBUTION RULES

FIDUCIARY OF TRUST AND FIDUCIARY OF TRUST AND CORPORATION [IRC 267(b)CORPORATION [IRC 267(b)

(8)](8)] MORE THAN 50% IN VALUE OF THE

OUTSTANDING STOCK OF WHICH IS OWNED, DIRECTLY OR

INDIRECTLY, BY OR FOR THE TRUST OR BY OR FOR A PERSON WHO IS A GRANTOR OF THE TRUST.

CORPORATION AND CORPORATION AND PARTNERSHIP [IRC 267(b)PARTNERSHIP [IRC 267(b)

(10)] (10)] IF THE SAME PERSONS OWN MORE THAN 50% IN VALUE OF THE

OUTSTANDING STOCK OF THE CORPORATION AND MORE THAN 50% OF THE CAPITAL INTEREST, OR THE PROFITS INTEREST, IN THE PARTNERSHIP.

AN S AND A C AN S AND A C CORPORATION [IRC 267(b)CORPORATION [IRC 267(b)

(12)] (12)] IF THE SAME PERSONS OWN MORE THAN 50% IN VALUE OF THE

OUTSTANDING STOCK OF EACH CORPORATION.

NOTENOTE

“267 RELATED” IS DEFINED BY “>50%”.

BUT IRC 318 ATTRIBUTION PERMITTED FROM/TO CORPORATIONS WHEN “50% OR MORE” OWNERSHIP

IRC 267(c): CONSTRUCTIVE IRC 267(c): CONSTRUCTIVE OWNERSHIPOWNERSHIP

FOR PURPOSES OF DETERMINING, IN APPLYING SUBSECTION (b), THE OWNERSHIP OF STOCK . . . CONSIDER IRC 267(c)(1)-(5):– ATTRIBUTION FROM ENTITIES– FAMILY ATTRIBUTION– PARTNER ATTRIBUTION

IRC 267(c)(1): ATTRIBUTION IRC 267(c)(1): ATTRIBUTION FROM ENTITIES (% AFE)FROM ENTITIES (% AFE)

STOCK OWNED, DIRECTLY OR INDIRECTLY, BY OR FOR A CORP, PARTNERSHIP, ESTATE, OR TRUST SHALL BE CONSIDERED AS BEING OWNED PROPORTIONATELY BY OR FOR ITS SHAREHOLDERS, PARTNERS, OR BENEFICIARIES.

NOTE: UNLIKE IRC 318NOTE: UNLIKE IRC 318

NO % REQUIREMENT (IRC 318 requires “50% or more” ownership to get attribution from a corporation)

NO “ATE ALL” (IRC 318 contains an attribution to entities) – BUT B/C OF 267(c)(1), AS SHDRS, P’S, OR

BENES COULD BE ENTITIES, THERE COULD BE ENTITIES RECEIVING ATTRIBUTION.

IRC 267(c)(2): FAMILY IRC 267(c)(2): FAMILY ATTRIBUTIONATTRIBUTION

AN INDIVIDUAL SHALL BE CONSIDERD AS OWNING THE STOCK OWNED, DIRECTLY OR INDIRECTLY, BY OR FOR HIS FAMILY

IRC 267(c)(4): THE FAMILY OF AN INDIVIDUAL SHALL INCLUDE ONLY HIS BROTHERS AND SISTERS (. . .WHOLE OR HALF BLOOD), SPOUSE, ANSCESTORS, AND LINEAL DESCENDANTS.

NOTE: UNLIKE 318, NOTE: UNLIKE 318, “FAMILY’ MEANS:“FAMILY’ MEANS:

ALL THE WAY UP (not 1 up) ALL THE WAY DOWN (not 2 down) ALL THE WAY TO THE SIDES (only

spouses permitted in IRC 318)

IRC 267(c)(3): PARTNER IRC 267(c)(3): PARTNER ATTRIBUTIONATTRIBUTION

AN INDIVIDUAL OWNING . . . ANY STOCK IN A CORPORATION SHALL BE CONSIDERED AS OWNING THE STOCK OWNED, DIRECTLY OR INDIRECTLY, BY OR FOR HIS PARTNER.

DO NOT ATTRIBUTE PARTNER’S FAMILY ATTRIBUTION STOCK

318 HAS NO PARTNER ATTRIBUTION

IRC 267(c)(5): IRC 267(c)(5): REATTRIBUTIONSREATTRIBUTIONS

STOCK ATTRIBUTED FROM AN ENTITY TO ENTITIES, FAMILY, AND PARTNERS IS REATTRIBUTABLE TO OTHERS.– INDIVIDUALS RECEIVING ATTRIBUTION

FROM ENTITIES MAY REATTRIBUTE BUT INDIVIDUALS RECEIVING

ATTRIBUTION FROM A FAMILY MEMBER OR A PARTNER CANNOT REATTRIBUTE TO ANYONE.

PRO-RATA DEFINITION: PRO-RATA DEFINITION:

DISTRIBUTION MUST BE ROPORTIONATE TO STOCK OWNERSHIP

EXAMPLE 2: PRO-RATA EXAMPLE 2: PRO-RATA DISTRIBUTIONDISTRIBUTION

CORP OWNED BY A (40%) AND BY B (60%)

CORP HAS TWO ASSETS:ASSET 1 W/FMV $40, ASSET 2 W/ FMV $60

PRORATA MEANS– A GETS 40% OF ASSET 1 AND 40% OF

ASSET 2

– B GET 60% OF ASET 1 AND 60% OF ASSET 2.

DISQUALIFIED PROPERTY: DISQUALIFIED PROPERTY: IRC 336(d)(1)(B)IRC 336(d)(1)(B)

DEFINED BY HOW AND WHEN ACQUIRED

HOW: IRC 351 OR CONTRIBUTION TO CAPITAL

WHEN: WITHIN FIVE YEAR PERIOD ENDING ON DISTRIBUITON DATE – LOOKBACK 5 YEARS FROM DATE OF

DISTRIBUTION

EXAMPLE 3EXAMPLE 3

DAY1/YR1: B SOLE SHDR OF X, TFRS CASH AND PTY W/120 FMV/90AB.

DAY1/YR4: X LIQUIDATES WHEN PTY FMV=70: 70-90=(20) NOT RECOGNIZED. B IS RELATED/PTY 2 IS “DISQUALIFIED”

SOLUTION SOLUTION

DAY1/YR2: B TRFR PTY TO NEW Y CORP

DAY1/YR3: MERGE Y AND X DAY1/YR4: X LIQUIDATES. PTY NOT ACQUIRED IN IRC 351 BY THE

LIQUIDATING CORP. IT WAS ACQUIRED BY THE MERGING

CORPORATION.

EXAMPLE 4EXAMPLE 4

Y CORP HAS CASH 4K AND PTY 12FMV/40AB (NOT DISQUALIFIED). OWNED 75% BY B AND 25% BY C.

IF PTY DISTRIBUTED PRO-RATA, CORP RECOGNIZES LOSS.

PTY IS JOINTLY OWNED, BUT B COULD PURCHASE C’S 25% AFTER LIQUIDATION. C RECOGNIZES NO GAIN B/C AB = FMV.

COLLAPSIBILITY?COLLAPSIBILITY?

IF COLLAPSED: NON-PRORATA AND Y CORP’S LOSS DISALLOWED.

HOWEVER SHOULD BE RESPECTED IF C HAD NO PRE-ARRANGED OBLIGATION TO SELL TO B. AMERICAN BANTAM CAR CO.

SPECIAL RULE: IRC 336(d)SPECIAL RULE: IRC 336(d)(2) (2)

APPLIES TO DISTRIBUTIONS TO RELATED AND NONRELATED PARTIES

DEFINED BY HOW AND WHEN ACQUIRED

THE “HOW”: THE “HOW”:

IRC 351 OR CONTRIBUTION TO CAPITAL AND

ACQUISITION’S PRINCIPAL PURPOSE WAS TO RECOGNIZE LOSS – FOR PRACTICAL PURPOSES:

ACQUISITIONS OF LOSS PROPERTIES, E.G., AB > FMV.

THE “WHEN”:THE “WHEN”:

TAINT EXISTS IF PROPERTY ACQUIRED WITHIN THE 2 YEARS ENDING ON THE ADOPTION OF PLAN OF LIQUIDATION

LOOKBACK 2 YEARS FROM PLAN’S ADOPTION

LEGISLATIVE INTENT: APPLY RARELY IF ACQUIRED LONGER THAN 2 YEARS FROM ADOPTION.

EFFECT OF SPECIAL RULE: EFFECT OF SPECIAL RULE: IRC 336(d)(2)(A)IRC 336(d)(2)(A)

REDUCE AB OF PROPERTY BY THE AMOUNT OF THE BUILT-IN LOSS AT TIME OF ACQUISITION.

EXAMPLE 5EXAMPLE 5

Z OWNS PTY FMV 15/AB 20, CONTRIBUTED 1 YEAR AGO.

THUS: AB = 20 - 5 AB EXCESS OVER FMV = 15

Z LIQ. PTY 1 TO UNRELATED PARTY WHEN FMV=10.

RESULT: 10 FMV -15 AB = (5 ) RECOGNIZED LOSS

EXAMPLE 6EXAMPLE 6

SAME AS 3. BUT NOW LIQ PTY 1 TO RELATED PARTY.

NO LOSS RECOGNIZED. SEE B/E 10-30. IF 336(d)(1) AND (2) OVERLAP, 336(d)(1) SHOULD APPLY TO DENY ALL LOSS.

EXAMPLE 7EXAMPLE 7

W CORP OWNED 70% BY A AND 30% BY B. W OWNS PTY 1, FMV 15/AB30 AND PTY 2, FMV 7.5/AB 3. PTY 1 CONTRIBUTED LAST YR WHEN FMV WAS 27.

W LIQ PRO-RATA: 70% OF PTY 1 AND PTY 2 TO A; 30% OF PTY 1 AND PTY 2 TO B.

TAX EFFECT TO W? TAX EFFECT TO W?

PTY 1: 336(d)(2): NEED TO ADJUST AB: 30 - 3 AB EXCESS OVER FMV = 27 AB.

THUS 15 FMV- 27 AB = (12) LOSS REALIZED.

AS A IS RELATED AND PTY 1 IS “DISQUALIFIED”. 70% OF LOSS (8.4) IS NOT RECOGNIZED.

WHAT ABOUT B?

B IS NOT RELATED, BUT B IS NOT RELATED, BUT 336(d)(2) APPLIES. 336(d)(2) APPLIES.

AS AB ADJUSTED TO 27, 30% (15 FMV - 27 AB) = (3.6) LOSS RECOGNIZED

THUS: OF THE 12 LOSS REALIZED, ONLY 3.6 IS RECOGNIZED

NOTE:NOTE:

336(d)(1): – APPLIES ONLY TO RELATED PARTIES

DISALLOWS ALL LOSSES: PRE AND POST ACQUISITION

336(d)(2): – APPLIES TO DISTRIBUTIONS TO BOTH

RELATED AND NONRELATED PARTIES– ALLOWS POST-ACQUISITION LOSSES

FILING REQUIREMENTSFILING REQUIREMENTS

ATTACHED TO RETURN: MINUTES @ PLAN ADOPTION AND INFO ABOUT PROPERTIES

FORM 966: TO IRS WITHIN 30 DAYS OF ADOPTION

FORM 109-DIV: TO SHAREHOLDERS BY 1/31 YEAR AFTER LIQ.

FORM 1096: TO IRS BY 2/28 YEAR AFTER LIQ.

CONCLUSIONCONCLUSION

LIQUIDATIONS TREATED AS SALES. ISSUE: WHETHER CORPORATION CAN

RECOGNIZE LOSS– DISTRIBUTION IS NON-PRORATA (ANY

PROPERTY)– DISTRIBUTION PRO-RATA + DISQUALIFIED

PROPERTY– TAX AVOIDANCE, E.G., B/I LOSS PTY W/I 2

YRS OF PLAN ADOPTION.

II. SUBSIDIARY II. SUBSIDIARY LIQUIDATIONSLIQUIDATIONS

IRC 332/337

IntroductionIntroduction

Definition of a liquidation Tax effect

DEFINITION OF “COMPLETE DEFINITION OF “COMPLETE LIQUIDATION”LIQUIDATION”

Treas. Reg. 1.332-2(c)(1) and Treas. Reg. 1.332-2(c)(1) and (2)(2)

one of a series . . . plan of liquidation . . . status of liquidation . . . completed when liquidating corporation and receiver or trustees in liquidation are finally divested of all the property . . .

Treas. Reg. 1.332-2(c)(2) Treas. Reg. 1.332-2(c)(2) cont.cont.

Status of liquidation exists when the corporation ceases to be a going concern and its activities are merely for the purpose of winding up its affairs, paying its debts, and distributing any remaining balance to its shareholders.

Treas. Reg. 1.332-2(c)(2) Treas. Reg. 1.332-2(c)(2) cont.cont.

A liquidation may be completed prior to the actual dissolution of the liquidating corporation. However, legal dissolution is not required. Nor will the mere retention of a nominal amount of assets for the sole purpose of preserving the corporation’s legal existence disqualify it.

Treas. Reg. 1.332-2(d)Treas. Reg. 1.332-2(d)

If a transaction constitutes a distribution in complete liquidation within the meaning of the IRC. . . it is not material that it is otherwise described under local law.

TAX EFFECTTAX EFFECT

Tax effect of corporate Tax effect of corporate liquidation: Subchapter C; Part liquidation: Subchapter C; Part

II II Subpart A: Effect on recipients: IRC 331; 332;

334– IRC 331:

In other than IRC 332 liquidations: Applies to majority and minority shareholders

In IRC 332 liquidations: Applies to minority shareholders

– IRC 332: Liquidation of subsidiary Subpart B: Effect on corporation : IRC 336;

337; 338

Tax effect on recipients Tax effect on recipients (parent): IRC 332(a)(parent): IRC 332(a)

“No gain or loss shall be recognized on the receipt by a (parent) corporation of property distributed in complete liquidation of another (its subsidiary) corporation.”

Rationale: Liquidation of a subsidiary represents a change of form and not a change in economic investment.

Elements in IRC 332(b)Elements in IRC 332(b)

Ownership Timing of ownership Complete cancellation or redemption of

stock Timing of distribution

OwnershipOwnership

80% direct (not constructive) ownership:– > 80% of combined voting power, and – > 80% total value of all stock

Except nonvoting, nonparticipating preferred

Timing (length) of ownership:Timing (length) of ownership:

From: Day plan was adopted To: Last liquidating distribution

Complete cancellation or Complete cancellation or redemption of stockredemption of stock

Legal dissolution of subsidiary is not required.

OK to retain minimal amount to protect legal existence and preserve corporate charter

Timing of distribution: Two Timing of distribution: Two alternativesalternatives

One year liquidation Multiyear liquidation

One year liquidationOne year liquidation

Liquidating distribution completed within one (1) of the subsidiary’s taxable year. – Shareholders’ resolution will suffice.

It is considered a “plan of liquidation”: IRC 332(b)(2)

– Liquidation does not have to take place in year of resolution.

Multiyear liquidationMultiyear liquidation

Liquidating distributions to be completed in > 1 of the subsidiary’s taxable year– Formal plan must be adopted– Distributions completed within 3 taxable years after

the close of the taxable year of the first distribution. Note: Distribution will not be considered a

“liquidating distribution” if there is a failure to complete liquidation timely or a failure to meet the ownership requirements.

Tax PlanningTax Planning

Like IRC 351, IRC 332 is not an elective section: You either fall “within” or “without”.

Hence, like IRC 351, to avoid IRC 332, you can plan – to fail one of the requirements, e.g., get below

80%.

– to make sure you meet the requirements, e.g., get to 80%.

IssuesIssues

Insolvent subsidiary Subsidiary debt (not classified as a security) Minority shareholders

Insolvent subsidiary: IRC Insolvent subsidiary: IRC 165(g)(3)165(g)(3)

As parent gets no “property” for its stock, IRC 332 does not apply.

Instead treat as loss from worthless securities [IRC 165(g)].– Capital or Ordinary?

Generally capital, but Generally capital, but ordinary ordinary loss treatment if falls under loss treatment if falls under

IRC 165(g)(3)IRC 165(g)(3) Parent has IRC 351 “control”

= > 80% of aggregate voting class and power and => 80% of each non-voting class;

– o/t nonvoting stock limited and preferred as to dividends

“Active” type subsidiary for all taxable years

> 90% of gross receipts from non-passive income

Subsidiary debt [o/t “security” Subsidiary debt [o/t “security” under IRC 165(g)(2)]under IRC 165(g)(2)]

Debt considered a “security” if it has interest coupons or issued in registered form.

Thus, loss from receipt of “debt” in bearer form and without interest coupons in a liquidating distribution is deductible as a business bad debt.

Effect on liquidating Effect on liquidating corporation: corporation:

IRC 336 IRC 337

IRC 336IRC 336

Except as otherwise provided in this section or section 337, gain or loss shall be recognized to a liquidating corporation on the distribution of property in complete liquidation as if such property was sold to the distributee at its fair market value.

Therefore, barring exceptions, Therefore, barring exceptions, treat liquidating distributions treat liquidating distributions

as a sale of property as a sale of property

ExceptionsExceptions

Various, within IRC 336, covered in Tax 6105.

IRC 337

IRC 337IRC 337

No gain or loss shall be recognized to the liquidating corporation on the distribution to the 80-percent (parent) distributee of any property in complete liquidation to which section 332 applies.

No depreciation recapture by subsidiary– AB c/o to parent corporation

Loss distributions to minority Loss distributions to minority shareholdersshareholders

While minority shareholders may recognize a loss in the receipt of a liquidating corporation, IRC 336(d)(3) prohibits recognition of loss by the liquidating subsidiary in a IRC 332 liquidation.

Issue: Liquidating distribution Issue: Liquidating distribution is “debt”is “debt”

Indebtedness of one of the parties is distributed as “property” in a liquidating distribution– Parent’s indebtedness to subsidiary (subsidiary

is the creditor).– Subsidiary’s indebtedness to parent (subsidiary

is the debtor; parent is the creditor)

Parent’s indebtedness to Parent’s indebtedness to subsidiary.subsidiary.

– Is parent’s receipt of its own note to the subsidiary produce gain from discharge of indebtedness?

– Answer: No, because debt is “property” received in an IRC 332 liquidation.

Subsidiary’s indebtedness to Subsidiary’s indebtedness to parentparent

IRC 337(b) Sub distributes appreciated property in

cancellation of debt to parent. – Treat as “property” transferred in a liquidating

distribution. – Sub does not recognize gain on appreciated

property– Parent takes c/o AB

Tax Planning for the Tax Planning for the subsidiarysubsidiary

Distribute appreciated property to parent corporation

Distribute cash to minority shareholders But sell loss property to unrelated taxpayers

to recognize loss.

Other tax effectsOther tax effects

Parent inherits subsidiary’s AB in assets: IRC 334(b)(1)

Parent inherits tax attributes: IRC 381– EP: IRC 381(c)(2)– capital loss carryovers: – NOL carryover: – Potential depreciation recapture: 1245(b)(3)

Parent’s AB on subsidiary’s stock disappears.