111 ACCY 272 Session 10 Chapter 7 (A,B,C) COMPLETE LIQUIDATIONS Text (Lind [6e]), pp Problems, pp , 344, Cases, pp [Court Holding Co.], [Cumberland Public Service Co.], [Riggs, Inc.] by Hugh Pforsich

222 A.Introduction [ ]Introduction B.Complete Liquidations Under §331 [ ]Complete Liquidations Under §331 1.Consequences to the Shareholders [ ]Consequences to the Shareholders ProblemsProblems [ ] 2.Consequences to the Liquidating Corporation [ ]Consequences to the Liquidating Corporation a.Background [ ]Background Case: Commissioner v. Court Holding Co. [ ] Case: Commissioner v. Court Holding Co. Case: United States v. Cumberland Public Service Co. [ ] Case: United States v. Cumberland Public Service Co. Note [ ] Note b.Liquidating Distributions and Sales [340]Liquidating Distributions and Sales c.Limitations on Recognition of Loss [ ]Limitations on Recognition of Loss Problem [344] Problem C.Liquidation of a Subsidiary [ ]Liquidation of a Subsidiary 1.Consequences to the Shareholders [ ]Consequences to the Shareholders Case: George L. Riggs, Inc. v. Commissioner [ ] Case: George L. Riggs, Inc. v. Commissioner 2.Consequences to the Liquidating Subsidiary [ ]Consequences to the Liquidating Subsidiary Problems [ ] Problems Chapter 7 (A,B,C) [ ] – Table of Contents

3 A. Introduction [ ]

4 B. Complete Liquidations Under §331 [ ]

5 B. Complete Liquidations Under §331 [ ] 1. Consequences to the Shareholders [ ]

6 B. Complete Liquidations Under §331 [ ] 1. Consequences to the Shareholders [ ] Problems [ ] A owns 100 shares of Humdrum Corporation which he purchased several years ago for $10,000. Humdrum has $12,000 of accumulated earnings and profits. What are the tax consequences to A on the liquidation of Humdrum Corporation in the following alternative situations: (a) Humdrum distributes $20,000 to A in exchange for his stock? (b) What result in (a), above, if A receives $10,000 in the current year (year one) and $10,000 in year two? Would there be any problem if Humdrum does not adopt a formal plan of complete liquidation in year one? (c) Humdrum distributes $8,000 cash and an installment obligation with a face and fair market value of $12,000, payable $1,000 per year for 12 years with market rate interest. The installment obligation was received by Humdrum two months ago, after the adoption of the plan of liquidation, on the sale of a capital asset. Would the result be different if Humdrum's stock were publicly traded? See LR.C. §453(k). (d)Same as (c), above, except the installment obligation was received two years ago and no payments have been made. (e)What result in (a), above, if two years later, A is required to pay a $5,000 judgment against Humdrum in his capacity as transferee of the corporation? Compare this with the result if the judgment had been rendered and paid by the corporation prior to the liquidation. See Arrowsmith v. Commissioner, 344 U.S. 6, 73 S.Ct. 71 (1952).

7 B.Complete Liquidations Under §331 [ ] 2. Consequences to the Liquidating Corporation [ ]

8 B.Complete Liquidations Under §331 [ ] 2. Consequences to the Liquidating Corporation [ ] a. Background [ ]

9 B.Complete Liquidations Under §331 [ ] 2. Consequences to the Liquidating Corporation [ ] a. Background [ ] Case: Commissioner v. Court Holding Co. [ ]

10 B.Complete Liquidations Under §331 [ ] 2. Consequences to the Liquidating Corporation [ ] a. Background [ ] Case: United States v. Cumberland Public Service Co. [ ]

11 B.Complete Liquidations Under §331 [ ] 2. Consequences to the Liquidating Corporation [ ] a. Background [ ] Case: United States v. Cumberland Public Service Co. [ ] Note [ ]

12 B.Complete Liquidations Under §331 [ ] 2. Consequences to the Liquidating Corporation [ ] b. Liquidating Distributions and Sales [340]

13 B. Complete Liquidations Under §331 [ ] 2. Consequences to the Liquidating Corporation [ ] c. Limitations on Recognition of Loss [ ]

14 B.Complete Liquidations Under §331 [ ] 2. Consequences to the Liquidating Corporation [ ] c. Limitations on Recognition of Loss [ ] Problem [344] All the outstanding stock of X Corporation is owned by Ivan (60 shares) and Flo (40 shares), who are unrelated. X has no liabilities and the following assets: Unless otherwise indicated, assume that Gainacre and Lossacre each asset have been held by X for more than five years. On January 1 of the current year, X adopted a plan of complete liquidation. What are the tax consequences to X on the distribution of its assets pursuant to the liquidation plan in each of the following alternatives? (a) X distributes each of its assets to Ivan and Flo as tenants-in­common in proportion to their stock interests (i.e., Ivan takes a 60% interest and Flo a 40% interest in each asset). (b) Same as (a), above, except X distributes Lossacre and the cash to Ivan and Gainacre to Flo. (c) Same as (b), above, except X distributes Gainacre and the cash to Ivan and Lossacre to Flo. (d) Same as (a), above, except X acquired Lossacre as a contribution to capital four years ago, and X was not required to reduce its basis under §362(e). Is the result different if Lossacre had a value of $1,000,000 and a basis of $800,000 at the time it was contributed to the corporation? AssetAdj. BasisFMV Gainacre100,000$ 400,000$ Lossacre800,000$ 400,000$ Cash200,000$ $

15 B.Complete Liquidations Under §331 [ ] 2. Consequences to the Liquidating Corporation [ ] c. Limitations on Recognition of Loss [ ] Problem [344] (e)What result on the distributions in (c) above (i.e. Gainacre and cash to Ivan, Lossacre to Flo) if Lossacre, which had no relationship to X's business operations, was transferred to X by Ivan and Flo in a Section 351 transaction 18 months prior to the adoption of the liquidation plan, when Lossacre had a fair market value of $700,000 and an adjusted basis of $800,000? Assume, alternatively, that Section 362(e)2) did and did not apply to the contribution of Lossacre to X. (f)Now assume than Ivan and Flo own 80% and 20%, respectively, of X, which was formed with Ivan contribution Gainacre and Lossacre (same adjusted basis and fair market value as in introductory facts above) and Flo contributing $200,000 cash. Assume further that Lossacre is Section 336(d)(1) "disqualified property," Section 362(e)(2) applied to Ivan's contributions to X but Section 336(e)(2) does not apply to the liquidation distribution of Lossacre because there was no "plan" for X to recognize loss on that property. Pursuant to a liquidation plan, X distributes each of the assets to the two shareholders in proportion to their stock interests. (g)Same as (f), above, except assume that Section 362(e)(2) applied to Ivan's contribution to X and Section 336(d)(2) applies to Lossacre because there was a "plan" by X to recognize loss in that property.

16 C. Liquidation of a Subsidiary [ ]

17 C. Liquidation of a Subsidiary [ ] 1. Consequences to the Shareholders [ ]

18 C. Liquidation of a Subsidiary [ ] 1. Consequences to the Shareholders [ ] Case: George L. Riggs, Inc. v. Commissioner [ ]

19 C. Liquidation of a Subsidiary [ ] 2. Consequences to the Liquidating Subsidiary [ ]

20 C. Liquidation of a Subsidiary [ ] 2. Consequences to the Liquidating Subsidiary [ ] Problems [ ] 1. P, Inc. ("P") owns 90 percent of the outstanding stock of S, Inc. ("S"). Individual ("I") owns the remaining 10 percent of S. P's basis in its S stock is $3,000. I’s basis in his S stock is $200. S has AEP of $2,000 and the following assets: S wishes to liquidate and distribute all of its assets to its shareholders. What are the tax consequences to P, S and I in the following alternative situations? (a) S distributes the inventory to I and the other assets to P. (b) S distributes the equipment to I and the other assets to P. How might S improve this result? (c) What result in (b), above, if P's basis in its S stock were $30,000 and S had a $30,000 basis in the land? (d) Is (c), above, a situation where P might wish to avoid the application of §332? Why? How might this be accomplished? Consider in this regard the §332 qualification requirements and how a parent might assure that they are not met. AssetAdj. BasisFMV Land3,000$ 8,000$ Equipment2,500$ 1,000$ Inventory100$ 1,000$

21 C. Liquidation of a Subsidiary [ ] 2. Consequences to the Liquidating Subsidiary [ ] Problems [ ] 2. Child Corporation has 100 shares of common stock outstanding. Mother Corporation owns 75 shares (basis- $1,000) and Uncle, an individual who recently inherited his stock, owns 25 shares (basis-$3,000). Child has no E&P, a $10,000 NOL carryover and the following assets (all held long-term): What are the tax consequences in the following alternative situations, disregarding the impact of any tax paid by Child as a result of its liquidating distributions? (a) Child adopts a plan of complete liquidation and distributes $2,000 cash to Uncle and all its remaining assets to Mother. (b) Child distributes $2,000 cash to Uncle in redemption of his 25 shares. One week later, it adopts a plan of complete liquidation and distributes its remaining assets to Mother pursuant to the plan. What are Mother and Child trying to accomplish through this reunion? AssetAdj. BasisFMV Cash2,000$ $ Installment Note1,000$ 4,000$ Land100$ 1,000$ Equipment (all §1245 gain)100$ 1,000$ Total3,200$ 8,000$

22 C. Liquidation of a Subsidiary [ ] 2. Consequences to the Liquidating Subsidiary [ ] Problems [ ] 3.Parent Corporation ("P") owns all the stock of Subsidiary Corporation ("S"). P has a $1,000 basis in its 8 stock and also holds S bonds with a basis and face amount of $1,000. S has the following assets: P intends to liquidate S, but before adopting a formal plan S distributes the inventory in satisfaction of its outstanding $1,000 debt to P. On the next day, S liquidates, distributing the land to P. Why did P and S structure the transactions in this manner? Will they achieve their tax objectives? AssetAdj. BasisFMV Inventory10,000$ 1,000$ Land200$ 10,000$ 10,200$ 11,000$