Chapter 6 6 Corporate Liquidating Distributions

Slide 7-2 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

Corporate Liquidating Distributions Non-Subsidiary Liquidations

Slide 7-4 Liquidating Distributions [Reg. § (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

Slide 7-5 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 corporation’s stock Distribution amount is cash plus FMV of other property received less liabilities assumed

Slide 7-6 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)]

Slide 7-7 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)]

Slide 7-8 Corporation’s Treatment The corporation recognizes gain or loss on the distributions it makes in complete liquidation as if the property was sold at its fair market value [IRC §336(a)]

Slide 7-9 Corporation’s 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

Slide 7-10 Corporation’s 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

Slide 7-11 Corporation’s 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]

Slide 7-12 Corporation’s 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

Slide 7-13 Corporation’s 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