Chapter
6
Corporate
Liquidating Distributions
Corporate
Liquidating Distributions
Liquidations of
Controlled Subsidiaries
Slide 7-3
Liquidations of Subsidiaries
Qualifying liquidations:
Ownership of 80% of voting and nonvoting stock
[IRC §332(b)(1) & IRC §1504(a)(2)]
Distribution is in complete cancellation or
redemption of stock [IRC §332(b)(2)]
Timing if series of distributions [IRC §332(b)(3)]
Slide 7-4
Liquidations of Subsidiaries
Parent corporation recognizes no gain/loss on
the receipt of a distribution from a liquidating
solvent subsidiary [IRC §332(a)]
Parent corporation deducts losses on liquidating
distributions from insolvent subsidiaries as
ordinary losses if 90% gross receipts test is met
[IRC §165(g)(3)]
Slide 7-5
Liquidations of Subsidiaries
Basis in the property transferred generally
carries over to the parent [IRC §334(b)(1)]
Holding period of property carries over to
parent [IRC §1223(2)]
Depreciation recapture potential carries over to
parent [IRC §1245(b)(3) and IRC §1250(d)(3)]
Slide 7-6
Liquidations of Subsidiaries
[IRC §334(b)(1)(B)] Parent’s basis in
subsidiaries assets is FMV if:
Parent is a U.S. Corporation
Liquidating subsidiary is a foreign corporation, and
Aggregate adjusted basis of transferred property
exceeds the aggregate FMV
Slide 7-7
Liquidations of Subsidiaries
Minority shareholders in the subsidiary are
taxed under the general rules for liquidating
distributions [IRC §331]
Slide 7-8
Liquidations of Subsidiaries
Subsidiary recognizes no gain or loss on
distributions made to parent corporation
distributee [IRC §337(a) and (c)]
Subsidiary recognizes gains but not losses on
distributions of property to minority shareholder
[IRC §336(a) and (d)(3)]
Example 5
Slide 7-9
Liquidations of Subsidiaries
Certain tax attributes carry over to parent
corporation [IRC §381]
NOL carryovers
Earnings and profits
Capital loss carryovers
Tax credits
Excess charitable contributions
Corporate
Liquidating Distributions
Other Issues
Slide 7-11
Property Distributions to Retire Debt
A creditor recognizes gain (loss) when a
corporation pays off a debt with property other
than cash (FMV of the property less the debt
discharged) [IRC §1001]
Creditor’s basis in the property is FMV
A debtor corporation recognizes gain (loss)
when it pays off a debt with property other than
cash (Debt discharged less property basis)
[IRC §1001]
Slide 7-12
Property Distributions to Retire Debt
Liquidating subsidiary recognizes no gain or
loss when transferring property to parent
corporation in satisfaction of debt [IRC §337(b)]
Parent’s basis in the property received equals the
subsidiary’s basis [IRC §334(b)(1)]
Parent corporation recognizes gain or loss if the
FMV of the property received differs from the
basis in the debt [IRC §1001(c)]
Slide 7-13
Property Distributions to Retire Debt
Example 6
Slide 7-14
Series of Distributions
For a series of distributions, it is essential that a
liquidation status exist at the time the first
distribution is made under the plan and that such
status continue until the liquidation is completed
[Reg. §1.332-2(c)]
Liquidation status means corporation has ceased to
be a going concern and its activities are solely to
wind up its affairs and distribute property
Liquidation is complete when substantially all of the
corporation’s property has been divested
Slide 7-15
Series of Distributions
For a series of distributions, losses cannot be
recognized until the shareholder receives the
final liquidating distribution or until it becomes
clear that no more distributions will be made
[Rev. Rul. 68-348, 1968-2 C.B. 141,
Rev. Rul. 79-10, 1979-1 C.B. 140, &
Rev. Rul. 85-48, 1985-1 C.B. 126]
Slide 7-16
Subsequent Assessments
If the shareholder has to pay an unanticipated
liability subsequent to the liquidation, the
treatment of the payment depends on the gain
or loss recognized in the liquidation
[Court cases]
Slide 7-17
Corporation’s Final Return
Liquidating corporation can deduct expenses of
liquidation in its final tax return
Selling expenses of selling assets reduces the
amount realized from the sale of the assets
Unamortized organizational costs are deductible
in the final return (Reg. §1.248-1(b)(3)]
NOL in the final year can be carried back and
the refund increases the gain (decreases the loss)
recognized by the shareholders
Slide 7-18
Treatment of Shareholders
Accrual method shareholders recognize
gain/loss when all events have occurred that fix
the amount of the liquidating distribution and the
shareholder is entitled to receive the liquidating
distribution upon surrender of the shares [Reg.
§1.451-1(a)]
Cash method shareholders recognize gain/loss
when liquidating distributions are actually or
constructively received [Reg. §1.451-1(a)]
Slide 7-19
Sale versus Liquidation
Example 7