Corporate Liquidating Distributions

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CorporateLiquidating Distributions
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Chapter
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Corporate Liquidating Distributions

• Liquidations of
• Controlled Subsidiaries

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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)

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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)

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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)

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Liquidations of Subsidiaries

• IRC 334(b)(1)(B) Parents 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

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Liquidations of Subsidiaries

• Minority shareholders in the subsidiary are taxed
  under the general rules for liquidating
  distributions IRC 331

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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

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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

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Corporate Liquidating Distributions

• Other Issues

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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
• Creditors 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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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)
• Parents basis in the property received equals
  the subsidiarys 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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Property Distributions to Retire Debt

• Example 6

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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 completedReg. 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 corporations property has been divested

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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
  madeRev. 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

• 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 liquidationCourt cases

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Corporations 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
  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 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 Liquidation

• Example 7