Two Liquidation Modes

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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
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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 with 12 month
period after liquidation plan adopted and
liquidation must be completed within same period.
Inventory and dealer qualify only if part of
bulk sale of assets.
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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) disallowed 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.
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Partnership Liquidation 731 732
731 No gain or loss recognized to partner
unless - Gain to extent money distributed
exceeds partners basis in partnership interest.
- Loss recognized if only money and
unrealized receivables and inventory distributed
to extent basis in partners interest exceeds
amount of money distributed and partnerships
basis in receivables and inventory. - Any
recognized gain or loss is from sale or exchange
of partnership interest. 732(b) If property
distributed to partner in liquidation of
partnership interest, basis in property shall
equal partners interest in partnership less
money receives in distribution. 751(b) Game
Applied full tilt. Note 736 Roadmap not
applicable on complete liquidation.
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Complete Liquidation Impact on Partnership
General Rule No gain or loss to partnership
on distributions of property to liquidate a
partners interest in partnership. 731(b)
751(b) Impact To extent of 736(b) payments not
reflect partners proportionate share of
unrealized receivables and inventory, deemed
distribution of additional receivables and
inventory to partner followed by partners sales
to partnership for cash. Impact is ordinary
income to partner and increased basis in such
assets to partnership (result of deemed by
back). Partnerships Assets Basis No
change per 734(a) unless 754 election made. If
754 election, basis in capital or 1231 assets (1)
increased by gain recognized by distributee
partner and excess of partnership basis in
distributed property over basis to distributee
under 732 and (d) decreased by loss recognized
by distributee and excess of distributee basis
over partnerships basis. 708 Termination
Liquidation terminates partnership. Also deemed
termination if 50 or more of partners interest
in profits and capital sold within 12 month
period. Old partnership terminated and new
partnership formed. Complete carryovers, but tax
year closed out and new elections.
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S Corp 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. Note, shareholder
stock basis increased by corporate gain, so often
little or no tax due. Timing Issues - 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 with 12 month
period after liquidation plan adopted and
liquidation must be completed within same period.
Inventory and dealer qualify only if part of
bulk sale of assets.
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S Corp 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.
Gain or loss passed thru to shareholders. (d)(1)
Related Party Exception No loss at all on
distribution to related party (per 267) in
complete liquidation if - Distribution
note 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) disallowed 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.