Chapter 6: Corporate Liquidating Distributions

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Chapter 6Corporate Liquidating Distributions
Chapter 6 Corporate Liquidating Distributions
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LIQUIDATING DISTRIBUTIONS

• Complete liquidation vs. dissolution
• Effects of liquidation on shareholders
• Effects of liquidation on liquidating corporation
• Liquidation of a controlled subsidiary
• Special shareholder issues
• Debt retirement

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Complete Liquidation vs. Dissolution (1 of 3)

• Complete liquidation
• Completely cancel or redeem all of corps stock
  in accordance with plan of liquidation OR
• One of a series of distributions in accordance
  with plan of liquidation

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Complete Liquidation vs. Dissolution (2 of 3)

• Liquidation status
• Corporation ceases to be going concern
• Activities for purpose of winding up its affairs,
  paying debts, distributing remaining property
  to shareholders
• Retention of nominal assets does not alter
  liquidation status

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Complete Liquidation vs. Dissolution (3 of 3)

• Dissolution of corporation
• A legal action that requires corporation to
  surrender its charter to the state
• Possible to liquidate corporation without
  dissolving it
• Dissolution frees corporate name for use by
  others

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Effects of Liquidation on Liquidating Shareholders

• Amount of recognized gain or loss
• Character of gain or loss
• Basis of property received by shareholder
• See Table C6-1 for a summary

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Amount of Recognized Gain/Loss

• Shareholder assumed to have sold stock for FMV of
  net assets received
• FMV of assets - liabilities received
• - Basis of stock surrendered
• Amount of gain (loss) recognized

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Character of Gain/Loss

• General rule
• Gain or loss treated as capital transaction
• Exceptions
• 1244 stock receives ordinary loss treatment
  (subject to limitations)
• Losses sustained by a parent in a worthless stock
  investment in a controlled subsidiary receive
  ordinary loss treatment

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Basis of Property Received by Shareholder

• General liquidation rules
• Basis of property received is FMV on distribution
  date
• Holding period starts day after distribution date

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Effects of Liquidation on Liquidating Corporation

• Recognition of gains/losses
• Liabilities assumed by shareholders
• Exceptions to general rule
• See Table C6-2 for a summary

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Recognition of Gains/Losses

• General rule
• Both gains losses recognized
• Tax attributes disappear

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Liabilities Assumed by Shareholders

• General rule
• Distributed assets valued at FMV
• Rule when liability exceeds FMV of related asset
  distributed
• FMV of related asset cannot be less than amount
  of liability assumed or acquired

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Exceptions to General Rule(1 of 2)

• Distributions to related parties
• No loss recognized by corp unless
• Property distributed pro rata to all s/h
• Property NOT acquired by capital contribution or
  351 w/in past five years
• Gains recognized in accordance with general rule

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Exceptions to General Rule(2 of 2)

• Tax-avoidance purpose
• Losses disallowed if primary purpose of
  acquisition of property in 351 transfer or
  capital contribution was to produce losses to
  offset gains from the liquidation of other
  property
• Rule also applies to sales, exchanges, or other
  distributions of such property

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Liquidation of a Controlled Subsidiary

• Requirements for liquidation of subsidiary into
  parent
• Effects of liquidation on shareholders
• Effects of liquidation on subsidiary

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Requirements for Liquidation of Subsidiary into
Parent (1 of 2)

• Parent owns ? 80 of voting power AND value of
  stock
• Must be complete cancellation or redemption of
  subsidiarys stock
• Distribution(s) w/in a single tax year
• Or qualify as one of a series of distributions
  completed w/in three years after year of first
  distribution

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Requirements for Liquidation of Subsidiary into
Parent (2 of 2)

• Subsidiary must be solvent
• Nonrecognition does not apply to minority
  stockholders
• Nonrecognition does not apply if parent receives
  payment to satisfy subsidiarys indebtedness to
  parent

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Effects of Liquidation on Shareholders (1 of 2)

• Effects on parent corporation
• Tax attributes carry over to parent including
  basis and holding period
• Types of tax attributes
• Potential for depreciation recapture
• NOL carryovers
• Earnings and profits balance
• Capital loss carryovers
• General business other tax credits

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Effects of Liquidation on Shareholders (2 of 2)

• Effects on minority shareholders
• Taxed under general liquidation rules under 331
• No carryover of basis or holding period

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Effects of Liquidation on Subsidiary

• Special rule for controlled subsidiary
• No gain or loss recognized when controlled
  subsidiary transfers its assets and liabilities
  to parent corp

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End of Chapter 6
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