Corporate Liquidating Distributions

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CorporateLiquidating Distributions
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Chapter
2
In General

• A liquidating corporation is essentially taxed as
  if it had sold all of its assets
• Shareholders of liquidating corporations are
  essentially taxed as if they sold their stock

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Corporate Liquidating Distributions

• Non-Subsidiary Liquidations

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Liquidating Distributions

• Reg. 1.332-2(c) A liquidating distribution is
  defined as a distribution that is(1) made by a
  liquidating corporation in complete cancellation
  or redemption of all of its stock in accordance
  with a plan of liquidation, or(2) one of a
  series of distributions in complete cancellation
  or redemption of all of its stock in accordance
  with a plan of liquidation

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Shareholders Treatment

• IRC 331(a) Distributions received in complete
  liquidation of a corporation are treated as
  amounts realized on the sale or exchange of the
  corporations stock
• Distribution amount is cash plus FMV of other
  property received less liabilities assumed

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Shareholders Treatment

• Gains (losses) on sales of corporate stock are
  generally capital gains (losses) IRC 1221
• Loss on qualified small business stock is an
  ordinary loss up to 100,000 (MFJ)/50,000
  (other) IRC 1244(a)

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Shareholders Treatment

• Basis of property received as a liquidating
  distribution is FMV IRC 334(a)
• Holding period of property received as a
  liquidating distribution begins on the day after
  the distribution IRC 1223(1)

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Corporations Treatment

• The corporation recognizes gain or loss on
  thedistributions it makes in complete
  liquidation asif the property was sold at its
  fair market valueIRC 336(a)

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Corporations Treatment

• If property is distributed subject to a liability
  or the shareholder assumes a liability in
  connection with the distribution, the FMV of the
  property is treated as not less than the amount
  of the liability IRC 336(b)
• Examples 1 2

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Corporations Treatment

• IRC 336(d)(1)(A)(i) Losses cannot be
  recognized on distributions to related parties if
  the distribution is not pro rata
• Related party defined IRC 267
• Example 3

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Corporations Treatment

• IRC 336(d)(1)(A)(ii) Losses cannot be
  recognized on distributions to related parties if
  distribution is disqualified property
• Disqualified property defined IRC 336(d)(1)(B)
  
• Related party defined IRC 267

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Corporations Treatment

• For purposes of determining the loss on a
  distribution of property in complete liquidation,
  the adjusted basis of certain property is reduced
• Amount of reduction IRC 336(d)(2)(A)
• Description of property IRC 336(d)(2)(B)
• Tax avoidance purpose IRC 336(d)(2)(B)(i)(II)
• Example 4

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Corporations Treatment

• Any remaining tax attributes of the liquidating
  corporation are generally lost such as
• NOL carryovers
• Earnings and profits
• Capital loss carryovers
• Tax credits
• Excess charitable contributions