#11710 - Complete Liquidation - Corporate Tax (Duke Zelenak)

SH level: Section 331(a): amounts received by SH in complete liquidation are treated as full payment in exchange for the SH’s stock.

1. The vast majority of SH hold their stock as a capital asset and thus will recognize capital gain or loss.

2. 334(a) SH’s basis in property received as a result of liquidation shall be FMV of the property

3. Section 346(a) allows treating a series of distributions as a complete liquidation

Corporation level

1. Section 336: Corporation should recognized gain or loss on the distribution of property as if the property were sold to the distribute at its FMV

   1. Allows loss

   2. Allows losses on liquidating distributions to related parties

   3. limitations

      1. Limitations on distribution to related persons: Section 336(d)(1) no loss shall be recognized by a liquidation corporation on the distribution of property to a Section 267 related person if either (1) the distribution is not pro rata among the SH; or (2) the distributed property was acquired by the liquidating corporation in a Section 351 transaction or as a contribution to capital within last 5 years.

      2. Losses with tax avoidance purpose: Section 336(d) limits the corporation’s deductible loss to the amount that accrued after the corporation acquired the property. Corporation should reduce basis in property by the amount of built-in loss in the property.

      3. Overlap situations: if both 336(d)(1) and (d)(2) apply, use (d)(1)

      4. This not no longer important because 362(e)(2) requires corporation to step down the basis of built-in loss property to FMV when the property is transferred to a corporation.

Parent SH

1. Non recognition - Section 332: a parent corporation recognizes no gain or loss on the receipt of property in complete liquidation of an 80 percent or more subsidiary if the requirements below are met.

   1. Instead, the parent corporation inherits the subsidiary’s E&P and other tax attributes under section 381(a)(1)

   2. Not available to minority SH

2. Requirements to qualify under 332

   1. subsidiary distributes property to its parent in complete cancellation or redemption of its stock

   2. Control: Section 332(b)(1) the parent must own at least 80 percent of the total voting power, and 80 percent of the total value of all outstanding stock

   3. Timing: distributions must be within 3 years.

Liquidating subsidiary

1. Distribution of property: a liquidating corporation generally recognizes gain or loss on distributions of property in a complete liquidation.

   1. Exception: Section 337: a liquidating subsidiary does not recognize gain or loss on distributions of property to its parent where 332 applies.

   2. Section 334(b)(1) parent takes a transferred basis in property received from a subsidiary

2. Distribution to minority SH

   1. Treated in the same manner as a distribution in a nonliquidation redemption (331).

   2. 336(d)(3): subsidiary cannot recognize loss on a distribution of property to minority SH in a Section 332 liquidation.

3. Transfer of property to satisfy indebtedness of subsidiary to parent

   1. Section 337(b)(1): if a subsidiary is indebted to its parents, a transfer of property to satisfy the debt shall be treated as distribution subject to the nonrecognition rule of 337(a)

4. Distribution to tax-exempt and foreign parents

Problem 1, p347

1. For S:

   1. Distribution to I (taxable 331 and 336): recognize 1k-100=900 gain, increase E&P to 2900

   2. Distribution to P: (337) a liquidating subsidiary does not recognize gain or loss on distributions of property to its parent, so no gain no...