Liquidations & Reorganizations, p. 1
ACC570 - Chapter 20
LIQUIDATING DISTRIBUTIONS (& REORGANIZATIONS OVERVIEW )
I.
Tax Consequences of Corporate Liquidations. - General rule is to treat the distribution as a
sale/exchange. A corporation may liquidate without surrendering its charter to the state and
undergoing dissolution. Dissolution may never occur if the charter is retained to protect the
corporate name.
A. Shareholder recognizes gain or loss is extent that money and the FMV of property
received exceeds the adjusted basis of the stock.
B. Corporation recognizes gain or loss as if the property were sold to the distributee.
II.
Effects of Liquidating on the Shareholders.
A. Amount of Recognized Gain or Loss.
 G(L) = amount realized - basis of stock.
 Amount realized = FMV property received - liabilities assumed.
B. When Was Stock Acquired? A shareholder must compute gain or loss separately for
each share or block of stock owned.
C. Partially Liquidating Distributions. The shareholder's basis is first recovered and then
gain is recognized once the basis of a particular share or block of stock has been fully
recovered.
D. Basis of Property Received in the Liquidation.
 FMV on the date of distribution.
 holding period starts on the day after the distribution.
E. Installment Obligations Received by a Shareholder. (Exception to the normal rule of
valuing assets at FMV) If an installment note was acquired by the corporation within 12
months after adoption of the liquidation plan, installment method of recognition is
allowed for the shareholder. Shareholder allocates stock basis to all assets distributed.
Gain is deferred on the installment note; gain is recognized on all other assets.
Liquidations & Reorganizations, p. 2
III. Effect on the Liquidating Corporation.
A. Recognizes Gain or Loss When Property is Distributed in Redemption of Stock.
1. Liabilities Assumed by the Shareholder. Use the same rule as in dividend
distributions, i.e., gain measured by greater of (FMV or debt) less basis.
2. Exceptions to the General Rule on Loss Recognition.
a. No loss on distributions of property to a related person (Sec. 267 rules - >50%
owner) if the distribution is:
(1) NOT pro rata, or
(2) the property being distributed is disqualified property (defined as property
acquired by corporation within last five years under a Sec. 351 transaction).
b. Built-in losses property distributions
(1) Applies to property contributed to corporation within 2 years of liquidation
adoption that had a built-in loss (presumption rule).
(2) The effect of this limit is to deny any built-in loss at the acquisition date. Only
post-acquisition losses may be recognized.
c. Examples. A and B own C Corp. (60% & 40%). C has two assets to distribute in
liquidation: #1 has FMV of $60 and basis of $80; #2 has FMV of $40 and basis
of $30.
* Distributes #1 to A and #2 to B:
* Distributes #1 and #2 to A and B as joint owners (60/40).
Liquidations & Reorganizations, p. 3
* Joint distribution again, except that asset #1 was contributed in a Sec. 351
transaction within last 5 years.
* Joint distribution again, except that asset #1 was contributed within 2 years, where
basis was $80 and FMV was $65.
IV. Liquidation of a Controlled Subsidiary Corporation. (§332)
A. General Rules.
1. No gain or loss is recognized by either party when a controlled subsidiary
corporation is liquidated into its parent corporation. Treatment is mandatory.
a. Minority interest shareholders use the general rule, i.e., taxable liquidation.
However, the subsidiary corporation cannot recognize loss on distribution to
minority shareholders.
2. Basis of property received is its basis in the hands of the subsidiary. Property received
by minority shareholders has a basis equal to its FMV because gain or loss is
recognized.
B. Requirements
1. Stock Ownership. The parent corporation must own 80% of all classes of stock
(other than certain nonvoting preferred issues) from the date on which the plan of
liquidation is adopted until receipt of the property of the subsidiary. The Sec. 318
attribution rules do not apply.
Liquidations & Reorganizations, p. 4
2. Timing of Distributions. The subsidiary corporation must distribute all properties
within one tax year, over 4 years if a formal plan is adopted.
3. Subsidiary must be Solvent.
C. § 338 Election.
1. General Treatment
a. Deemed Sale. Subsidiary corporation is treated as having sold all of its assets at
their FMV in a single transaction at the close of the acquisition date. Gain
recognized.
b. Basis of the Assets. Stepped-up (down) to the amount paid by the acquiring
corporation for the target corporation stock. This is called the adjusted grossed-up
basis, because the new basis must reflect the % owned by parent.
c. Allocation of Basis to Individual Assets. The adjusted grossed-up basis is
allocated among four classes of assets using the residual method. Any amount not
allocated to tangible or intangible assets of the target corporation is allocated to
goodwill and going concern value.
2. Requirements
a. Acquiring corporation must purchase 80% or more of the target corporation's
voting stock and total value of all classes of stock (except nonvoting preferred)
during a 12-month period beginning on the day the first purchase is made.
b. Sec. 338 election must be made not later than 8 ½ months after the month in
which the acquisition date occurs.
V.
REORGANIZATIONS
A. General Rules.
1. Tax-free exchange
2. Shareholders
a. No gain or loss recognized when they exchanges stock and securities for that
in the new corporation.
b. Basis in new stock & securities is a carryover basis.
c. If boot is received (i.e., property other than stock or securities), gain is
recognized to the extent of boot received (gain would increase basis).
3. Corporations
a. No gain or loss recognized by any of the corporations involved.
b. Basis of property transfers from one corporation to the other.
B.
Types of Reorganizations follow….
Liquidations & Reorganizations, p. 5
TAX-FREE CORPORATE REORGANIZATIONS SUMMARY
Property Acquired
Consideration that
What happens to
Advantages
can be used
Target (B)
Corporation?
All assets & liabilities Stock, securities, &
B Corp. is liquidated
Doesn’t have to be
of B Corp.
other property of A
as part of the merger
voting stock
Corp.
Type
Description
A
Merger or
consolidation
B
Stock-for-stock
exchange
At least 80% of voting
and nonvoting stock of
B Corp.
Voting stock of A
Corp.
Remains in existence
as a subsidiary of A
Corp.
C
Assets-for-stock
exchange
“Substantially all” of
the assets of B Corp.
(and some or all of its
liabilities)
Normally liquidated
D
Divisive – (spin-off,
split-off, or split-up)
Part or all of Parent
corp’s assets (maybe
liabilities) are
transferred to a
controlled subsidiary
Stock, securities, &
other property of A
Corp, provided 80%
of the assets are
acquired for voting
stock
Stock, securities, &
other property of
Subsidiary corp.
E
Recapitalization
F
Change in identity,
form, or place or
organization
A change to the capital
structure of a single
corporation occurs
Single corp. assets or
stock are transferred to
a new corporation
Bonds for stock, stock
for stock, bonds for
bonds.
Stock, securities, &
other property of the
new corporation
G
Court-approved
bankruptcy
reorganization
Part or all of the assets
(maybe some
liabilities) of B Corp.
are transferred to
another corporation
Stock, securities, &
other property of A
Corp.
Stock & securities of
the Subsidiary corp
must be distributed.
Parent may be
liquidated or stay in
existence
Corporation remains
in existence
Old corporation is
liquidated.
B Corp. may be
liquidated or remain in
existence
Procedures are easier;
stock can be acquired
directly from
shareholders
Very similar to, but
less complex than, a
Type A reorg.;
Cash can be used, as
long as < 20% of total
Permits corporate
division without tax
consequences
Allows for a major
change in makeup of
stockholders’ equity
New corporation is
treated as same as the
Old corporation; all
tax attributes of OldCo
transfer
Creditors can
exchange notes for
stock tax-free; don’t
have to follow state
merger laws.
Disadvantages
All of B Corp’s
liabilities are assumed
by A Corp.; State
merger laws
Only voting stock of A
Corp. can be used.
B Corp. must
distribute the stock,
securities, and other
property to its
shareholders
Liquidations & Reorganizations, p. 6
TYPE A REORGANIZATION
STATUTORY MERGER
A shareholders

own
A
Corporation

own
B
Corporation
B shareholders
Transaction
A
Corporation
B
Corporation
B shareholders

B
Corporation
Result
A shareholders

B shareholders
own

own
A Corporation
(owns all of A’s &
B’s assets & has
assumed all of B’s
liabilities)
Liquidations & Reorganizations, p. 7
TYPE A REORGANIZATION
CONSOLIDATION
A shareholders

own
A
Corporation

own
B
Corporation
B shareholders
Transaction
A
Corporation
C
Corporation
B
Corporation
A shareholders

B shareholders

A
Corporation
B
Corporation
Result
A shareholders

B shareholders
own

own
C Corporation
(owns all of A’s &
B’s assets & has
assumed all of A’s &
B’s liabilities)
Liquidations & Reorganizations, p. 8
TYPE B REORGANIZATION
A shareholders
own

B shareholders
own
A
Corporation

B
Corporation
Transaction
B shareholders

A
Corporation
Result
A shareholders

B shareholders
own
A Corporation
own

B Corporation
Liquidations & Reorganizations, p. 9
TYPE C REORGANIZATION
A shareholders
own

B shareholders
own
A
Corporation

B
Corporation
Transaction
A
Corporation
B
Corporation
B shareholders

B
Corporation
Result
A shareholders

B shareholders
own

own
A Corporation
(owns all of A’s &
“substantially all” of
B’s assets & has
assumed part or all
of B’s liabilities)
Liquidations & Reorganizations, p. 10
TYPE D REORGANIZATION
SPIN-OFF
P shareholders

own
P
Corporation
Transaction
P
Corporation
NEW
Corporation
P shareholders
 
P
Corporation
Result
P shareholders

own
P
Corporation
own
NEW
Corporation
Liquidations & Reorganizations, p. 11
TYPE D REORGANIZATION
SPLIT-OFF
P shareholders

own
P
Corporation
Transaction
P
Corporation
NEW
Corporation
Some
P shareholders

P
Corporation
Result
Former
P shareholders
P shareholders
own

P
Corporation
own

NEW
Corporation
Liquidations & Reorganizations, p. 12
TYPE D REORGANIZATION
SPLIT-UP
P shareholders

own
P
Corporation
Transaction
P
Corporation
NEW 1
Corporation
NEW 2
Corporation
P shareholders

P
Corporation
P shareholders

Result
Former
P shareholders
own

Former
P shareholders
NEW 1
Corporation
own

NEW 2
Corporation