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Corporate Liquidating Distributions

6. Chapter. Corporate Liquidating Distributions. 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.

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Corporate Liquidating Distributions

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  1. 6 Chapter CorporateLiquidating Distributions

  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

  3. Corporate Liquidating Distributions Non-Subsidiary Liquidations

  4. Liquidating Distributions • [Reg. §1.332-2(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

  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

  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)]

  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)]

  8. Corporation’s Treatment • The corporation recognizes gain or loss on thedistributions it makes in complete liquidation asif the property was sold at its fair market value[IRC §336(a)]

  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

  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

  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]

  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

  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

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