Chapter 6 6 Corporate Liquidating Distributions. Liquidations of Controlled Subsidiaries

ChapterChapter 66

CorporateLiquidating Distributions

CorporateLiquidating Distributions

Corporate Liquidating Distributions


Liquidations of

Controlled Subsidiaries

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Liquidations of SubsidiariesLiquidations 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)]

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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)]

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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)]

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[IRC §334(b)(1)(B)] Parent’s basis in subsidiaries assets is FMV if:Parent is a U.S. CorporationLiquidating subsidiary is a foreign corporation, andAggregate adjusted basis of transferred property

exceeds the aggregate FMV

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Minority shareholders in the subsidiary are taxed under the general rules for liquidating distributions [IRC §331]

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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

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Certain tax attributes carry over to parent corporation [IRC §381]NOL carryoversEarnings and profitsCapital loss carryoversTax creditsExcess charitable contributions



Other Issues

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Property Distributions to Retire DebtProperty 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]

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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)]

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Example 6

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Series of DistributionsSeries 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

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Series of DistributionsSeries 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]

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Subsequent Assessments Subsequent Assessments

If the shareholder has to pay an unanticipated liability subsequent to the liquidation, the treatment of the payment depends on the gainor loss recognized in the liquidation[Court cases]

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Corporation’s Final Return Corporation’s Final Return

Liquidating corporation can deduct expenses of liquidation in its final tax returnSelling expenses of selling assets reduces the

amount realized from the sale of the assets

Unamortized organizational costs are deductiblein 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

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Treatment of ShareholdersTreatment 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/losswhen liquidating distributions are actually or constructively received [Reg. §1.451-1(a)]

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Sale versus LiquidationSale versus Liquidation

Example 7

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Chapter 6 6 Corporate Liquidating Distributions. Liquidations of Controlled Subsidiaries