Chapter
6
Corporate
Liquidating Distributions
Slide 7-2
In General
A liquidating corporation is essentially taxed as
if it had sold all of its assets
Shareholders of liquidating corporations are
essentially taxed as if they sold their stock
Corporate
Liquidating Distributions
Non-Subsidiary Liquidations
Slide 7-4
Liquidating Distributions
[Reg. §1.332-2(c)] A liquidating distribution is
defined as a distribution that is
(1) made by a liquidating corporation in
complete cancellation or redemption of all of its
stock in accordance with a plan of liquidation, or
(2) one of a series of distributions in complete
cancellation or redemption of all of its stock in
accordance with a plan of liquidation
Shareholders’ Treatment
Slide 7-5
[IRC §331(a)] Distributions received in
complete liquidation of a corporation are treated
as amounts realized on the sale or exchange of
the corporation’s stock
Distribution amount is cash plus FMV of other
property received less liabilities assumed
Slide 7-6
Shareholders’ Treatment
Gains (losses) on sales of corporate stock are
generally capital gains (losses) [IRC §1221]
Loss on qualified small business stock is an
ordinary loss up to $100,000 (MFJ)/$50,000
(other) [IRC §1244(a)]
Shareholders’ Treatment
Slide 7-7
Basis of property received as a liquidating
distribution is FMV [IRC §334(a)]
Holding period of property received as a
liquidating distribution begins on the day after
the distribution [IRC §1223(1)]
Slide 7-8
Corporation’s Treatment
The corporation recognizes gain or loss on the
distributions it makes in complete liquidation as
if the property was sold at its fair market value
[IRC §336(a)]
Slide 7-9
Corporation’s Treatment
If property is distributed subject to a liability or
the shareholder assumes a liability in connection
with the distribution, the FMV of the property is
treated as not less than the amount of the
liability [IRC §336(b)]
Examples 1 & 2
Slide 7-10
Corporation’s Treatment
[IRC §336(d)(1)(A)(i)] Losses cannot be
recognized on distributions to related parties if
the distribution is not pro rata
Related party defined [IRC §267]
Example 3
Slide 7-11
Corporation’s Treatment
[IRC §336(d)(1)(A)(ii)] Losses cannot be
recognized on distributions to related parties if
distribution is disqualified property
Disqualified property defined [IRC §336(d)(1)(B)]
Related party defined [IRC §267]
Slide 7-12
Corporation’s Treatment
For purposes of determining the loss on a
distribution of property in complete liquidation,
the adjusted basis of certain property is reduced
Amount of reduction [IRC §336(d)(2)(A)]
Description of property [IRC §336(d)(2)(B)]
Tax avoidance purpose [IRC §336(d)(2)(B)(i)(II)]
Example 4
Slide 7-13
Corporation’s Treatment
Any remaining tax attributes of the liquidating
corporation are generally lost such as:
NOL carryovers
Earnings and profits
Capital loss carryovers
Tax credits
Excess charitable contributions