Presentation:
Corporate Taxation
Chapter Seven: Complete Liquidations
Professors Wells
March 2, 2015
Chapter 7 – Corporate
Complete Liquidations
p.318
The Structure of Part II of Subchapter C
Subpart A – Effects on Recipients
§§331, 332, & 334
Subpart B – Effects on the Liquidating Corp.
§§336, 337, & 338
Subpart C – Repealed in 2003
§341
Subpart D – Definitions – Complete Liquidation Defined
§346(a)
2 Liquidation vs. Dissolution
p.319
Liquidation as a tax concept – termination of corporate
activities, satisfaction of liabilities, and distribution of the
corporation’s assets.
Dissolution – a state law concept (termination of the charter).
See Texas Business Organizations Code §11.01 re “terminated
entity” and “winding up”.
§11.052 re “winding up procedures”
§11.101 re “certificate of termination”
3 Shareholder Tax Treatment
For Liquidation Distribution
p.320
§331(a) – a complete liquidation enables “sale or exchange” income
tax treatment to the shareholder of liquidating corporation.
§334(a) – tax basis to the shareholder for any property received in a
liquidation is its FMV at the time of the liquidation distribution.
Timing issues: (i) installment obligations distributed - §453(h)(1)(A)
and (ii) creeping liquidation distributions (and cost recovery)?
4 Problem (a)
Liquidation Distribution
FACTS: A owns 100 shares of
Humdrum Corp. purchased for
$10,000 (i.e., tax basis). Humdrum has
$12,000 accumulated E&P. Humdrum
distributes $20,000 to A in exchange
for A’s stock in its liquidation.
Result: $10,000 LTCG under §331.
($20,000 received less $10,000 basis).
A
p.322
$20,0
00 ca
sh
Humdrum Stk
B=$10,000
Humdrum
Acc. E&P= $12,000
E&P account is not relevant for this
transaction.
5 Problem (b)
Several Liquidation Payments
p.322
FACTS: $10,000 is received in two
A Year 1: $10
consecutive years.
Year
2: $1 ,000
0,000
RESULT:
Humdrum Stk
1.  If the two cash transfers are both
B=$10,000
liquidating distributions, then Rev.
Humdrum
Rul. 85-48 permits full recovery of
tax basis before reporting any gain
Acc. E&P= $12,000
(i.e., “open transaction” treatment
appears available). But, §453(j)(2) provides for ratable tax basis
recovery even when the selling price is not readily ascertainable.
2.  Unresolved Issue is whether the first distribution is part of a
liquidation plan. This is a factual question.
6 Problem (c)
Installment Reporting?
p.323
FACTS: Humdrum distributes $8,000
A
$8,00
0
cash and an installment obligation of
Insta cash
llmen
t not
$12,000, payable $1,000 per year for 12
e
years, with market rate interest. $10x
basis. The obligation is received by
Humdrum upon its sale of a capital asset
Humdrum
after liquidation plan adopted.
Acc. E&P= $12,000
RESULT: Gain of $10,000 is realized on the
liquidation, but the shareholder may report gain on the installment
note under §453(h)(1). Installment sales reporting treatment: (i)
$4,000 LTCG on the $8,000 cash payment and (ii) $500 LTCG for
each later $1,000 payment It is possible that A could use Rev. Rul.
85-48 to get basis recover first for the $8,000 and then report the
remainder on an installment basis. If stock were publicly traded,
then §453 is not available (see §453(k)(2)(A)) so $10,000 immediate
7 gain.
Problem (d)
Installment Note Received
FACTS: Installment obligation was
received two years ago and no payment
has been made on the obligation.
A
p.323
$8,00
0
Insta cash
llmen
t not
e
RESULT: Installment method is not
Humdrum
available to the shareholder. The use of the
installment sale method is not permitted
Acc. E&P= $12,000
when the note is created more than 12 months before the plan of
liquidation. See §453(h)(1)(A). A would: (1) recognize $10,000
LTCG (20,000 less 10,000 basis) and (2) take a $12,000 basis in the
installment obligation under §334(a).
8 Problem (e)
Later Payment of Judgment
FACTS: A required to pay a $5,000
judgment against Humdrum in his
capacity as a transferee.
A
$20,0
p.323
00 ca
sh
Humdrum Stk
B=$10,000
RESULT: A must report a long-term
Humdrum
capital loss on the payment. Why?
Arrowsmith tax case. The payment
Acc. E&P= $12,000
characterization relates back to the .
Earlier liquidation where long-term capital gain was reported.
If the judgment had been paid by Humdrum prior to liquidation, it
would have produced a $5,000 ordinary deduction to Humdrum and
reduced its net porceeds distributed to A by $5,000 (less a $1,750 tax
benefit).
9 Consequences to the
Liquidating Corporation
p.323
Issue: Does a distribution of property in kind in a complete
liquidation trigger gain recognition to the distributor corporation
as to the distributed asset?
Result: §336(a) – (1) requires recognition by the distributing
corporation of accrued property gain and (2) provides for the
availability (in some situations) of a loss deduction. Reversing
former §337 and the General Utilities doctrine. Cf., treatment of
loss on property distribution in the dividends context.
10 Historical Perspective –
Corporate Level Gain Tax?
1)  Commissioner v. Court Holding
Co. (p.324) Substance of the
transaction was a sale of an
apartment house (corporation’s
sole asset) by the corporation, not
by the shareholders.
Minnie
Miller
Cash
Buyer
Form
Rejected
Apt Bldg
Court Hldg
2)  U.S. v. Cumberland Public Service
Co. (p.326) Property transferred
to the shareholders as a
liquidation distribution in kind.
Held: Sale by the shareholders
and not by the corporation (and
no corporate level gain).
S/Hs
Cash
Buyer
Form
Accepted
Distribution
Assets
Cumberland
11 Response to Court Holding Decision
p.328
1)  Former Code §337 – Anti-Court Holding provision enabled
income tax immunity for sales of corporate assets after the
adoption of the liquidation plan. Seller could be either
corporation or shareholder but no corporate level gain.
2)  Subsequent response: 1986 repeal of the General Utilities
doctrine and gain recognition is required at the corporate
level for all asset sales, including after the liquidation plan
adoption. Code §336.
12 Limitations on Corporate
Loss Recognition
p.331
Loss can be recognized (sometimes). §336(a).
Cf., §311 – no loss can be recognized when a corporation
distribution is not in liquidation.
Certain losses are allowed even though the §267 loss limitation may
apply to transfers of loss property between related persons.
Double loss may be permitted (corporation and shareholder levels)
after a §351 dropdown of loss property. But, note: §362(e)(2).
13 Limitations on Corporate Loss
Deduction Availability
p.333
Related Persons:
1)  If the distribution is not prorata. §336(d)(1)(A)(i).
2)  Where the property is acquired by the corporation within
five years of distribution. An “anti-stuffing rule”. §336(d)(A)
(ii).
All shareholders: §336(d)(2) – losses with a “tax avoidance”
motive. Then only those losses accruing after contribution of
loss property to the corporation are allowed to corp. on
distribution.
14 Problem (a)
Prorata Asset Distributions
Prorata distribution of assets to Ivan
and Flo as tenants in common.
1.  Corporation: $400 loss recognized
and $300 gain is recognized.
§336(d) loss limitation rule is not
applicable because assets have
been held by Corp. for five years
and distributed pro ratably.
2.  Shareholders: take FMV basis in
each asset.
p.335
Ivan
Flo
60
40
X
Basis
Gainacre $100
Lossacre $800
Cash
$200
FMV
$400
$400
$200
15 Problem (b)
Loss Asset to Majority Owner
FACTS: Lossacre and cash to Ivan.
Gainacre to Flo. Not a prorata
distribution.
Ivan
Flo
60
Lossacre
& Cash
RESULT: Gain is recognized by X on the
transfer to Flo per §336(a), but loss is not
recognized since: (1) the distribution is
not prorata - §336(d)(1)(A)(i) and (2) Ivan
is related, i.e., he owns more than 50
percent of X Corporation - §267(b)(2).
p.335
40
Gainacre
X
Basis
Gainacre $100
Lossacre $800
Cash
$200
FMV
$400
$400
$200
16 Problem (c)
Loss Asset to Minority Owner
FACTS: Gainacre and cash to Ivan.
Lossacre to Flo.
p.335
Ivan
Flo
60
RESULTS: X Corporation recognizes the
$300,000 of gain on the distribution to Ivan.
X also recognizes the loss of $400 on
Lossacre to Flo because Flo is not a
“related person” and so the §336(d)(1)(A)
loss limitation is not applicable.
Gainacre
& cash
40
Lossacre
X
Basis
Gainacre $100
Lossacre $800
Cash
$200
FMV
$400
$400
$200
Flo and Ivan basis in property is $400,000.
Planning: Target loss property to minority
shareholder.
17 Problem (d)
Loss Asset Held Less Than 5 Years
Prorata distribution as tenants in common.
Lossacre was acquired as a contribution to X
Corporation capital four years ago.
Ivan
60
p.335
Flo
40
X
RESULT: The $300,000 gain on Gainacre is
recognized. Distribution of of Lossacre
Basis FMV
represents “disqualified property” under
Gainacre $100
$400
Lossacre $800
$400
§336(d)(1)(B). Consequently, only $160,000
Cash
$200 $200
(40%) of the $400,000 loss on Lossacre is
recognized. Lossacre had a value of $1 million and a basis of
$800,000 at the time contributed to X Corporation (i.e., appreciated).
Loss is not “built-in” but the property is “disqualified property”.
§336(d)(1)(B). Property is distributed to a “related person”. The
loss on the distribution to Ivan is not recognized (i.e., 60% of the
$400,000 loss).
18 Problem (e)
Loss Asset Held Less Than 2 Years
FACTS: Lossacre (no relationship to X’s
business operations) is transferred to X by
Ivan and Flo in a §351 transaction 18
months prior to the adoption of the
liquidation plan when Lossacre had a FMV
of $700,000 and an adjusted basis of
$800,000.
p.335
Ivan
Flo
60
Gainacre
& cash
40
Lossacre
X
Basis
Gainacre $100
Lossacre $800
Cash
$200
FMV
$400
$400
$200
RESULTS: Recognize $300 gain on
Gainacre. FMV declines to $400,000 FMV.
If no §362(e)(2) application (no basis step-down), then a partial loss
is recognized by X on its transfer of Lossacre to Flo of $300,000.
The $400,000 is reduced by the amount of the pre-contribution builtin loss.
19 Problem (f)
Gainacre and Lossacre transferred to X by
Ivan. Flo contributes 200x. Ivan assets: 900x
total basis and 800x FMV; Lossacre basis
reduced by 100x to 700x at time of
contribution to X by reason of §362(e)(2).
p.335
Ivan
Flo
80
20
Prorata
Prorata
X
Prorata distribution from X means that
§336(d)(1)(A) does not apply (distribution is
prorata). However, Lossacre is disqualified
property within the meaning of §336(d)(1)
(B). X has no loss deduction for 80% of the
300x remaining built-in loss since 80% was
distributed to a related party. 20% of the
loss (i.e., 20% of 300 = 60) is deductible.
Basis
Gainacre $100
Lossacre $800
$700
Cash
$200
FMV
$400
$400
$200
20 Problem (g)
§§362(e)(2) and 336(d)(2)
Assume: (1) §362(e)(2) applied to
Ivan’s contribution to X and (2)
§336(d)(2) applies to Lossacre because
a plan by X existed to recognize the
loss on that property.
No loss recognition is permitted.
p.336
Ivan
Flo
80
Gainacre
& cash
20
Lossacre
X
Basis
Gainacre $100
Lossacre $800
$700
Cash
$200
FMV
$400
$400
$200
21 Consequences of §331 Liquidation
Concluding Thoughts
A §331 Liquidation creates a separate taxable event at the
shareholder and at the corporate level.
Shareholder: §331 Gain* or Loss.
*§453(h) allows installment sale treatment for
distribution of installment note
§334 FMV basis in property received
Corporation: §336 Gain or Loss*
*§336(d) sets forth exceptions for
loss recognition
22 Liquidation of a Controlled Subsidiary
§332
p.336
Liquidation of a subsidiary into a parent
corporation – assets remain held in
corporate form (i.e., held by the parent
corporation).
Parent
Liquidate
Result to controlling corporate shareholder:
Under §332 – no gain or loss on the receipt
by the corporation of property in the
complete liquidation of an 80% or more
subsidiary.
Subsidiary
E&P of 100x
Appreciated Property of $1 million
Corp. parent’s sub stock basis disappears.
§334(b)(1) – transferred asset bases to
parent.
23 George L. Riggs
Liquidation Plan Adoption
Question: What timing for
measuring the ownership of at
least 80% of the stock?
Step One: Redeem Minority Shareholder
G Riggs, Inc.
Redemptions implemented by
corporation to get to the 90% share
ownership level in sub.
Held: The liquidation plan was
adopted when the formal
shareholder action was taken
(and not adopted previously).
p.338
Minority
72%
28%
Standard
Step Two: Liquidate Standard into Riggs
When is the liquidation plan
adopted?
G Riggs, Inc.
Liquidate
95.6%
Standard
Result: §332 is an elective provision.
24 Consequences to the
Distributing Corporation
p.344
§337 – nonrecognition of gain or loss results on distributions of
property by a subsidiary to its parent corporation in a complete
liquidation to which §332 applies.
§334(b)(1) – parent corporation takes (i) a transferred basis for
assets and (ii) carryover of recapture of depreciation, etc. potential.
No acceleration of the installment gain upon the upstream
distribution of notes. §453(d).
25 Distributing Corporation &
Minority Shareholders
p.345
Distribution of assets by the corporation in §332 liquidation to
minority shareholders triggers gain but not loss to the
corporation.
Loss distributions – see §336(d)(3) limitation.
No loss deduction – to avoid directed distributions of loss
property to the minority shareholders (who do have a
recognition event upon the receipt of the distribution).
26 Cancellation of Debt Owing
From Sub to Parent
p.345
Situation: Transfer of property to satisfy debt of the subsidiary to
the parent corporation.
§337(b)(1) – any transfer of property in satisfaction of a debt is
treated as a distribution and not as a taxable event.
Objective: Precludes picking loss property for transfer in
eliminating debt while having a tax-free transfer of the appreciated
property in the §332 liquidation. §334(b)(2).
27 Tax-Exempt & Foreign Parent Corp.
Recipients
p.346
§337(b)(2) – nonrecognition treatment for the liquidation of a
subsidiary is not available where the parent recipient corporation
is a tax-exempt organization.
Exception: This taxability treatment is not applicable if the
property is used in the tax exempt’s unrelated trade or business §511.
What impact when liquidation distribution is made to a foreign
parent corporation?
28 Problem 1(a)
Property Distributions
S distributes inventory
(appreciated) to I (10%) and
other assets to P, Inc. (90%).
P Co.
90%
p.347
Minority
10%
(B=3,000)
(B=$200)
i)  No recognition to P – realized
gain of $6,000 ($9,000 less
S Inc.
$3,000) and P gets 90% of the
E&P. §334(b) transferred
Acc. E&P= $2,000
Land (B=3,000 FMV=8,000)
basis for assets received.
Equip (B=2,500 FMV=1,000)
ii)  Individual Shareholder-Inv. (B=100 FMV=1,000)
recognize stock gain. $800 LTCG – basis 200 and inventory of
1,000 received. §334(a) re inventory basis to I.
iii) Treatment to S? Recognition for inventory.
29 Problem 1(b)
Depreciated Property to Indiv.
Equipment to I and other
assets to P.
P Co.
Minority
90%
1)  P has land and
inventory received with
§334(b)(1) basis, plus 90
percent of 2,000 E&P
(or 1,800) to P.
p.347
(B=3,000)
10%
(B=$200)
S Inc.
Acc. E&P= $2,000
Land (B=3,000 FMV=8,000)
Equip (B=2,500 FMV=1,000)
Inv. (B=100 FMV=1,000)
2)  I recognizes 800 stock gain – 1,000 FMV less 200 basis equals 800
gain; 1,000 (stepped-down) basis to I for the equipment received.
3)  S - §336(d)(3) – No loss recognition to S on the distribution to I
(& no E&P adjustment).
30 Problem 1(c)
High Tax Basis for Sub Stock
P’s basis in its S stock is
$30,000 and S also had a
$30,000 basis in the land.
P Co.
90%
Minority
(B=30,000)
If S is liquidated, the $30,000
basis for the stock and the loss
potential for the stock
disappears.
p347
10%
(B=$200)
S Inc.
Acc. E&P= $2,000
Land (B=30,000 FMV=8,000)
Equip (B=2,500 FMV=1,000)
Inv. (B=100 FMV=1,000)
The potential tax loss on the land is preserved in P’s hands through a
transferred tax basis for the land under §336(a).
Loss on the equipment to I is not preserved.
31 Problem 2(a)
When/How to Adopt Plan?
Child adopts plan of complete
liquidation and distributes
$2,000 cash to Uncle and
remaining assets to Mother
Corp. No §332.
1)  Child recognizes 3,000 on the
distribution of the installment
obligation; 900 gain on the land;
900 §1245 gain on the equipment.
Mother Co.
p.347
Uncle
75 C.S.
B=1,000
25 C.S.
B=$3,000
Child Co
NOL= $10,000
Cash=2,000
Inst. Note (B=1,000 FMV=4,000)
Land (B=100 FMV=1,000)
Equip (B=100 FMV=1,000)
2)  Uncle – 1,000 loss on the stock.
3)  Mother has 5,000 gain, also, not succeeding to the $10,000 NOL
of Child (less any gain).
32 Problem 2(b)
Redemption of Uncle’s Shares
2,000 cash to Uncle for a
redemption of his 25 shares and
the subsequent adoption of a plan
of liquidation by Child (into
Mother).
p.347
Step One: Redeem Uncle Shares
Mother Co.
Uncle
75 C.S.
B=1,000
Distribution of remaining assets
to Mother pursuant to a plan of Step Two:
owned
complete liquidation – when
Mother then owns 100 percent of
shares of Child.
No gain recognition then occurring. The
$10,000 NOL be preserved.
25 C.S.
B=$3,000
Child Co
Liquidate Child once wholly-
Mother Co.
Child Co
NOL= $10,000
Inst. Note (B=1,000 FMV=4,000)
Land (B=100 FMV=1,000)
Equip (B=100 FMV=1,000)
33 Problem 3
Debt Owing by Subsidiary
P owns all the S stock (having
$1,000 basis in the stock) and
holds S bonds with a tax basis
and a face value of $1,000.
Distribution of inventory in
satisfaction of $1,000 debt prior
to adopting a formal plan of
liquidation.
p.348
Parent
100% C.S.
B=1,000
Subsidiary
Inventory (B=10,000 FMV=1,000)
Land (B=200 FMV=10,000)
Objective of S is to recognize the $9,000 loss on the inventory.
Result: Step-transaction doctrine applicable so collapsed and
treated as all part of a liquidation.
34