(Textbook: Corporate, Partnership, Estate and Gift Taxation (2013 Ed.) by Pratt, Kulsard) I.Introduction
•Ch. 3 & 4: distributions of property and stock as well as those relating to redemptions and partial liquidations oCorp. continues to operate all or part of its business
•Ch. 5: complete liquidation
oBusiness’s profitability, or lack thereof, no longer justifies continuing the corp. oShareholders simply seek the corp’s cash and other assets to meet other needs oLiquidation often occurs in conjunction with a sale of the corporation’s business Corporation may sell the assets and subsequently distribute the sale proceeds to its shareholders in complete liquidation Corporation may distribute its assets to its shareholders in complete liquidation Buyer may purchase the target’s stock and subsequently liquidate its new subsidiary to obtain subsidiary’s assets Shareholders and management may wish to discard the corp. form to avoid tax problems like doubt taxation or risk of incurring accumulated earnings tax or the personal holding company tax (special penalty taxes imposed on corps that have improperly accumulated earning) If the corp. is suffering losses, another form of business such as a partnership would enable deduction of the losses by the owner o“Collapsible Corporations” discussed in this chapter
II.Complete Liquidations in General
•Definition of complete liquidation of a corp. - if the distribution is one of a series of distributions in redemption of all of the stock of the corp. pursuant to a plan •Applies only if the corp. is in a “status of liquidation” oExists when corp. ceases to be a going concern and is engaged in activities whose sole function is the winding up of its business affairs •Formal written plan indicating the intention to liquidate is not required oFactors merely suggesting the intention to liquidate are sufficient •Not necessary for the corp. to dissolve for the liquidation to be complete oCorp. may retain a nominal amount of assets provided the reason for the retention is to preserve the corp’s legal existence •Definition is imprecise
•Basic tax question: what is the effect of the liquidation on the liquidating corporation and the shareholder? •Sec. 331: tax treatment of shareholder of the liquidating corp. •Per Sec. 331: Shareholder treats the property received in liquidation of a corp. as proceeds obtained from the sale of stock oMust recognize gain or loss
oTypically a capital gain or capital loss
oBasis of any property received is FMV
•Sec. 336: treatment of the liquidating corp.
•Per Sec. 336: corp. must recognize gain and loss on distribution of property to its shareholders as part of a complete liquidation oE&P usually eliminated as is the corp’s basis in any property it distributes •Special rules exist that apply when a parent corp. causes a subsidiary to liquidate oSec. 332 and Sec. 337 primarily
•Sec. 338 may come into play as part of an acquisition when a parent corp. purchases the stock of another corp. and continues to operate it as a subsidiary •Normally assumed that the corp. is in the process of liquidating and fulfills the requirements evidencing a “status of liquidation” oIf status does not exist, these rules do not apply
Shareholders considered as having made and received a dividend distribution or a distribution in redemption of part of the corp’s stock and are treated accordingly III.Complete Liquidations: Effects on Shareholder
•Amount of G/L and basis in property received answered by determining whether the general rules covering all liquidations apply (Sec. 331) or the special rules of Sec. 332 concerning liquidations of a subsidiary •In this section, general rules governing all liquidations other than those of an 80 percent owned subsidiary are considered b.The General Rule: Sec. 331
•Gain or Loss
oAmount received considered payment in full...