Corporate Liquidating Distributions 6 Chapter Corporate Liquidating Distributions

Corporate Liquidating Distributions Liquidations of Controlled Subsidiaries

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)]

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)]

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)]

Liquidations of Subsidiaries [IRC §334(b)(1)(B)] Parent’s 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

Liquidations of Subsidiaries Minority shareholders in the subsidiary are taxed under the general rules for liquidating distributions [IRC §331]

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

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

Corporate Liquidating Distributions Other Issues

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] Creditor’s 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]

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)] Parent’s basis in the property received equals the subsidiary’s 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)]

Property Distributions to Retire Debt Example 6

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 completed [Reg. §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 corporation’s property has been divested

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 made [Rev. 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]

Subsequent Assessments If the shareholder has to pay an unanticipated liability subsequent to the liquidation, the treatment of the payment depends on the gain or loss recognized in the liquidation [Court cases]

Corporation’s 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 deductible in 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

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/loss when liquidating distributions are actually or constructively received [Reg. §1.451-1(a)]

Sale versus Liquidation Example 7