Two Liquidation Modes

1
Two Liquidation Modes
Straight Liquidation Mode
Sale and Liquidation Mode
Corp
Corp
Third Party
Corporate Assets
Cash, Notes
Corporate Assets
Cash, Notes
Stock Cancelled
Stock Cancelled
Shareholders
Shareholders
2
Complete Liquidation Shareholder Impact
General Rule Per 331, complete liquidation
treated as sale or exchange of stock, producing
capital gain or loss equal to difference between
cash and FMV of property received and
shareholders basis in stock. Section 301 not
apply. Timing Issues - When did liquidation
began and dividends (non-liquidating)
distributions end. Fact question. Look to
corporate resolutions and adoption of plan. -
453 installment sales treatment applies when
liquidating distributions over time. Open
transaction treatment very risky appears trumped
by 453. - 453 installment treatment permitted
even as to installment obligations acquired by
non-public corp in asset sell-off and distributed
to shareholders. To qualify under 453, corp sale
that created obligation must be within 12 month
period after liquidation plan adopted and
liquidation must be completed within same period.
Inventory and dealer property qualify allowed
only if part of bulk sale of assets.
3
Complete Liquidation Corporation Impact
General Rule Per 336, Corp recognizes gain or
loss on property distributed or sold as part of
complete liquidation. 267 related-party loss
limitations not apply in complete liquidation.
(d)(1) Related Party Exception No loss at all
on distribution to related party (per 267) in
complete liquidation if - Distribution
not pro rata, or - Distributed property
acquired by corp in 351 transaction or as
contribution to capital within 5 yrs of
distribution (Disqualified Property). (d)(2)
Tax Avoidance Exception No built-in loss (loss
at time of acquisition) allowed if property
acquired in 351 transaction or contribution to
capital and principal purpose was to recognize
loss on liquidation. If acquired within 2 yrs of
plan of liquidation, bad purpose a done deal
unless there is clear and substantial
relationship between property and conduct of
business and solid explanation. If outside 2yr
window, probably safe except in most rare
cases.
4
Problem 331

• Basic Facts A owns 100 shares of HCorp, cost
  10k. H Corp EP 12k. H Corp liquidates.
• A gets 20k cash in liquidation. A has LTCG of
  10k per 331(a).
• A gets 10k yr 1 and 10k yr 2. Under 453, A
  recognizes 5k LTCG in year 1 and 5k LTCG in year
  2. Service allows open reporting if amount
  uncertain if so, no gain until basis recovered.
  Can elect to opt out of 453 then full 10k LTCG
  in year 1.
• If no plan a liquidation in year 1, may be
  issue of whether both distributions are part of
  liquidation (fact issue). If not, then year 1
  distribution 10k ordinary income dividend under
  301 yr 2 liquidating distribution and no gain.

5
Problem 331

• Basic Facts A owns 100 shares of h Corp, cost
  10k. H Corp EP 12k. H Corp liquidates.
• A gets in liquidation 8k cash and 12k note,
  payable 1k per yr for 12 yrs. H obtained note on
  sale of capital asset as part of liquidation. A
  realizes 10k LTCG on sale. Per 453(h),
  installment reporting available on note if
  obtained by corp within 12 month period after
  adoption of plan of liquidation and liquidation
  completed in 12 months after plan. Gross profit
  percentage is 50. Hence, 4k LTCG yr 1 on
  receipt of 8k and .5k in each following year on
  receipt of 1k.
• If H stock publicly traded, 453(k)(2)(A)
  precludes use of 453. 10k LTCG.
• Same as (d), but installment obligation received
  by H two yrs ago and no payments made. No hope
  for installment reporting because obtained before
  plan of liquidation. 10K LTCG in year 1 and
  basis in note 12k.
• After liquidation, A pays 5k judgment against old
  H. Per Arrowsmith case, this 5k LTCL to A even
  though would have been deductible to H Corp.
  Character of loss determined with reference to
  LTCG reported by A.

6
Problem 344

• Basic Facts X Corp stock owned by I (60) shares
  and F (40 shares). No liabilities and following
  assets. On 1/1, adopts plan of liquidation.
• 
  Basis FMV
• Gainacre 100k
  400k
• Lossacre 800k
  400k
• Cash
  200k 200k
• All assets distributed to I and F 60-40 pro-rata
  as tenants-in-common. X Corp has 300k gain on
  Gainacre and 400k loss on Lossacre. Shareholders
  take basis equal to FMV per 334(a). 336(d) loss
  limitation not apply because distribution pro
  rata and assets held over 5 yrs.
• I gets Lossacre and cash F gets Gainacre. X has
  300k gain on Gainacre. Loss on Loassacre not
  allowed per 336(d)(1) because I is related person
  per 267 (more than 50) and distribution not pro
  rata. Is basis in Lossacre still 400k loss in
  permanently gone.

7
Problem 344

• Basic Facts X Corp stock owned by I (60) shares
  and F (40 shares). No liabilities and following
  assets. On 1/1, adopts plan of liquidation.
• 
  Basis FMV
• Gainacre 100k
  400k
• Lossacre 800k
  400k
• Cash
  200k 200k
• X distributes Gainacre and 200k to I and Lossacre
  to F. X recognizes 300k on Gainacre and 400k
  loss on Lossacre. Although not pro rata, F not
  related person under 267 because not over 50
  owner. Thus, 336(d) limit not apply.
• (d) Same pro rata as (a), but X acquired
  Lossacre 4 yrs ago as contribution to capital.
  Still 300k gain on Gainacre. 60 portion to
  Lossacre loss (240k) not allowed per 336(d)
  because go to I and disqualified property
  because acquired within 5 yrs in 351 transaction.
  Loss on portion to F (160k) allowed. I and F
  still take basis equal to FMV . Same result if
  Lossacre has 1 mill FMV and 800k basis on
  contribution to capital. For 336(d)(1) purposes,
  built-in gain or loss not applicable.

8
Problem 344

• Basic Facts X Corp stock owned by I (60) shares
  and F (40 shares). No liabilities and following
  assets. On 1/1, adopts plan of liquidation.
• 
  Basis FMV
• Gainacre 100k
  400k
• Lossacre 800k
  400k
• Cash
  200k 200k
• Gainacre and cash to I Lossacre to F Lossacre
  have no relationship to X business and acquired
  by 351 transfer from I and F 18 months prior to
  plan of liquidation when FMV 700k and basis 800k.
  336(b)(1) disallowance not apply because F not
  267 related party. But 336(b)(2) anti-stuffing
  rule might apply because 351 transaction within 2
  yrs of plan. If 362(e)(2) basis adjustment made
  at contribution, no need for 336(b)(2)
  anti-stuffing loss never realized. If no
  336(e)(2) adjustment, then 100k pre-contribution
  loss disallowed per 336(b)(2), but 300k
  post-contribution loss allowed. No hope of
  rebutting 2 yr taint presumption because asset
  not related to X business.

9
Problem 344

• Basic Facts X Corp stock owned by I (60) shares
  and F (40 shares). No liabilities and following
  assets. On 1/1, adopts plan of liquidation.
• 
  Basis FMV
• Gainacre 100k
  400k
• Lossacre 800k
  400k
• Cash
  200k 200k
• I and F own X Corp 80-20. I contributed Gainacre
  and Lossacre F contributed cash in 351 deal.
  Lossacre is 336(d)(1) disqualified property,
  362(e)(2) applied at contribution, 336(d)(2) not
  apply because no plan for X to recognize loss
  on liquidation. X distributes each asset
  pro-rata to parties in liquidation.
• - 362(e)(2) basis reduction is 100k
  (900k less 800k) based on Is contibution of
  assets.
• - Of remaining 300k built-in loss on
  Lossacre, 80 (240k) disallowed because I related
  party. Remaining 20 (60k) allowed as loss to X.

10
Problem 344

• Basic Facts X Corp stock owned by I (60) shares
  and F (40 shares). No liabilities and following
  assets. On 1/1, adopts plan of liquidation.
• 
  Basis FMV
• Gainacre 100k
  400k
• Lossacre 800k
  400k
• Cash
  200k 200k
• (g) Same as (f), but there was plan to have X
  recognize built-in loss. Then entire built-in
  loss disallowed per 336(d)(2). Fact that portion
  of Lossacre went to F (20 shareholder)
  irrelevant.

11
Subsidiary Liquidation
Impacts of qualifying as 332 subsidiary
liquidation - No gain or loss recognized by
parent corp per 332. - Parent corp takes
transferred basis in Subs assets per 334(b)(1).
- Parent corp inherits Subs EP and other tax
attributes (pro rata) per 381(a)(1). - No gain
or loss to Sub corp per 337, which overrides
1245, to extent distributions to 80-percent
distributee. - No relief to minority
shareholders liquidation gain recognized and
basis FMV. - Loss assets to satisfy Parent corp
debt not trigger loss per 337(b)(1). - No 337
relief if tax exempt owns stock. 337(b)(2).
12
Qualification Under 332

• Requirements
• Plan of complete liquidation adopted.
• 80 of total of Sub voting stock owned by
  corporate parent from adoption of plan until
  liquidation.
• 80 of total value of Sub stock owned by
  corporate parent from adoption of plan until
  liquidation.
• Timing either
• - One-shot liquidation within one taxable
  year.
• - Plan provides competed within 3 years
  after year of first distribution.

13
Problem 356-1

• Basic Facts P Inc. (P) owns 90 X Corp stock
  I owns 10. P basis 3k I basis .2k. X EP 2k.
  Following X assets
• 
  Basis FMV
• Land
  3,000 8,000
• Equip
  2,500 1,000
• Inventory
  100 1,000
• Liquidation scenarios
• Inventory to I other assets to P.
• - 332 requirements all met Both 80
  tests one-shot liquidation that meets timing
  requirements of 332(b)(2).
• - P recognizes none of 6k (9k less 3k
  basis) gain recognized.
• - I (10 individual) recognizes 900 gain
  (1k less 100 basis)
• - I basis in inventory 1k.

14
Problem 356-1

• Basic Facts P Inc. (P) owns 90 X Corp stock
  I owns 10. P basis 3k I basis .2k. X EP 2k.
  Following X assets
• 
  Basis FMV
• Land
  3,000 8,000
• Equip
  2,500 1,000
• Inventory
  100 1,000
• Liquidation scenarios
• Inventory to I other assets to P (Continued).
• - P basis in land 3k, equip 2.5k both
  carryover per 334(b)(1). P stock basis
  disappears.
• - X has 900 gain on inventory. No gain or
  loss on other assets because P 80-percent
  distributee per 337(c).
• - P picks up Xs tax attributes per 381
  and 90 EP. X EP is 2k plus .9k on inventory
  distribution for 2.9k total. Thus Ps EP goes
  up 2.61k (90).

15
Problem 356-1

• Basic Facts P Inc. (P) owns 90 X Corp stock
  I owns 10. P basis 3k I basis .2k. X EP 2k.
  Following X assets
• 
  Basis FMV
• Land
  3,000 8,000
• Equip
  2,500 1,000
• Inventory
  100 1,000
• Liquidation scenarios
• Equipment to I other assets to P. Same result
  as in (a) except no inventory gain to X, and EP
  carryover gain to P is 1.8k (90 of 2k). No loss
  recognition to X on 332 liquidation per
  336(d)(3). Improve by transferring loss
  equipment to P or selling loss equipment. If
  336(d)(2) not apply to sale, 1.5k loss recognized
  by X and transferred EP reduced to 450 (90 of
  500).
• Smart to sell loss asset if possible.
  Note, I basis in equipment 1k (step-down basis
  loss).

16
Problem 356-1

• Basic Facts P Inc. (P) owns 90 X Corp stock
  I owns 10. P basis 3k I basis .2k. X EP 2k.
  Following X assets
• 
  Basis FMV
• Land
  3,000 8,000
• Equip
  2,500 1,000
• Inventory
  100 1,000
• Liquidation scenarios
• Same as (b), but P basis in S stock 30k and X
  basis in land. P recognizes no loss X
  recognizes no loss. Land 30k basis carries over
  to P per 334(b)(1). I still has step down 1k
  basis in equipment and 800 gain. EP carryover
  to P still 1.8k.
• If flunk 332, P gets loss on stock. X still
  wont get loss because of 336(d)(1)(A) (P owns
  over 50). Two ways to flunk. P sells off over
  20 stock per Day Zimmerman case. Or X
  stretches liquidation over 3 yr. period. Also, X
  could sell loss asset and recognize loss
  (smartest).

17
Problem 356-2

• Basic Facts C Corp 100 shares out. M Corp
  owns 75 shares (basis 1k) U owns 25 shares
  (basis 3k). C has no EP 10k NOL following
  assets
• 
  Basis FMV
• Cash
  2,000 2,000
• Note
  1,000 4,000
• Land
  100 1,000
• Equip
  100 1,000
• Total
  3,200 8,000
• (a) C liquidates 2k cash to U rest to M. No
  332 because no 80. M has 5k gain (6k less basis
  of 1k). U has 1k loss (2k less 3k basis). C has
  3k gain on note, .8k gain on equip, all offset by
  NOL carryover. No carryover attributes to M. M
  and U have basis equal to FMV of assets received
  per 334(a).

18
Problem 356-2

• Basic Facts C Corp 100 shares out. M Corp
  owns 75 shares (basis 1k) U owns 25 shares
  (basis 3k). C has no EP 10k NOL following
  assets
• 
  Basis FMV
• Cash
  2,000 2,000
• Note
  1,000 4,000
• Land
  100 1,000
• Equip
  100 1,000
• Total
  3,200 8,000
• 2k to redeem U stock. Complete liquidation of C
  one week later. If 332 apply, M have no gain, C
  has no gain, no gain on installment note per
  453B(d), no 1245 gain to C per 1245(b)(3), full
  10k NOL carries over to M. No EP to carry over.
• Will 332 apply? Not per Rev. Rule 70-106 if
  prearranged and plan adopted before redemption
  (likely here). But see Riggs case much room to
  plan.

19
Problem 356-3
Basic Facts P Corp own all stock of S Corp and
holds bonds at face and book value of 1k. Before
332 liquidation, S corp distributes inventory
with 10k basis and 1k fair market value to retire
debt. Objective To recognize 9k loss before 332
liquidation. Result No hope. Step transaction
will kill. Note, P corp does pick up 10k basis
in inventory per 334(b)(1).