1
Chapter 6,
Corporate
Liquidating
Distributions
2
LIQUIDATING
DISTRIBUTIONS
?Complete liquidation vs,dissolution
?Effects of liquidation on shareholders
?Effects of liquidation on liquidating
corporation
?Liquidation of a controlled subsidiary
?Special shareholder issues
?Debt retirement
3
Complete Liquidation vs,
Dissolution (1 of 3)
?Complete liquidation
–Completely cancel or redeem all of
corp’s stock in accordance with plan
of liquidation OR
–One of a series of distributions in
accordance with plan of liquidation
4
Complete Liquidation vs,
Dissolution (2 of 3)
?Liquidation status
–Corporation ceases to be going concern
–Activities for purpose of winding up its
affairs,paying debts,& distributing
remaining property to shareholders
–Retention of nominal assets does not
alter liquidation status
5
Complete Liquidation vs,
Dissolution (3 of 3)
?Dissolution of corporation
–A legal action that requires corporation
to surrender its charter to the state
–Possible to liquidate corporation without
dissolving it
–Dissolution frees corporate name for use
by others
6
Effects of Liquidation on
Liquidating Shareholders
?Amount of recognized gain or loss
?Character of gain or loss
?Basis of property received by
shareholder
7
Amount of Recognized
Gain/Loss
?Shareholder assumed to have sold
stock for FMV of net assets received
FMV of assets - liabilities received
- Basis of stock surrendered
= Amount of gain (loss) recognized
8
Character of Gain/Loss
?General rule
–Gain or loss treated as capital transaction
?Exceptions
–§ 1244 stock receives ordinary loss
treatment (subject to limitations)
–Losses sustained by a parent in a
worthless stock investment in a controlled
subsidiary receive ordinary loss treatment
9
Basis of Property Received by
Shareholder
?General liquidation rules
–Basis of property received is FMV on
distribution date
–Holding period starts day after
distribution date
10
Effects of Liquidation on
Liquidating Corporation
?Recognition of gains/losses
?Liabilities assumed by shareholders
?Exceptions to general rule
11
Recognition of Gains/Losses
?General rule,
–Both gains & losses recognized
–Tax attributes disappear
12
Liabilities Assumed by
Shareholders
?General rule
–Distributed assets valued at FMV
?Rule when liability exceeds FMV of
related asset distributed
–FMV of related asset cannot be less than
amount of liability assumed or acquired
13
Exceptions to General Rule
(1 of 2)
?Distributions to related parties
–No loss recognized by corp unless
?Property distributed pro rata to all s/h
?Property NOT acquired by capital
contribution or § 351 w/in past five years
–Gains recognized in accordance with
general rule
14
Exceptions to General Rule
(2 of 2)
?Tax-avoidance purpose,
–Losses disallowed if primary purpose
of acquisition of property in § 351
transfer or capital contribution was to
produce losses to offset gains from the
liquidation of other property
?Rule also applies to sales,exchanges,or
other distributions of such property
15
Liquidation of a Controlled
Subsidiary
?Requirements for liquidation of
subsidiary into parent
?Effects of liquidation on shareholders
?Effects of liquidation on subsidiary
16
Requirements for Liquidation
of Subsidiary into Parent (1 of 2)
?Parent owns ? 80%of voting power
AND value of stock
?Must be complete cancellation or
redemption of subsidiary’s stock
?Distribution(s) w/in a single tax year
–Or qualify as one of a series of
distributions completed w/in three
years after year of first distribution
17
Requirements for Liquidation
of Subsidiary into Parent (2 of 2)
?Subsidiary must be solvent
?Nonrecognition does not apply to
minority stockholders
?Nonrecognition does not apply if
parent receives payment to satisfy
subsidiary’s indebtedness to parent
18
Effects of Liquidation on
Shareholders (1 of 2)
?Effects on parent corporation
–Tax attributes carry over to parent
including basis and holding period
–Types of tax attributes
?Potential for depreciation recapture
?NOL carryovers
?Earnings and profits balance
?Capital loss carryovers
?General business & other tax credits
19
Effects of Liquidation on
Shareholders (2 of 2)
?Effects on minority shareholders
–Taxed under general liquidation rules
under § 331
–No carryover of basis or holding
period
20
Effects of Liquidation on
Subsidiary
?Special rule for controlled subsidiary
–No gain or loss recognized when
controlled subsidiary transfers its
assets and liabilities to parent corp
21
Special Shareholder Issues
?Partially liquidating distributions
?Subsequent assessments
?Open versus closed transactions
?Installment obligations
22
Special Corporate
Reporting Issues
?Expenses of the liquidation
–Current expense if for plan of liquidation
–Sales expenses offset sales proceeds
?Treatment of net operating losses
–NOL created in liquidation year may be
carried back
23
Debt Retirement
?Property transferred to a creditor
–If FMV of property = debt obligation
?Corp recognizes gain (loss) if basis in
property is less than (greater than)
amount of obligation
–If FMV of property is < debt obligation
?Corp recognizes forgiveness of debt
income for difference
–Above rules do not apply to
subsidiary debt held by parent
24
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Email Richard Newmark at Dr.Newmark@PhDuh.com
Chapter 6,
Corporate
Liquidating
Distributions
2
LIQUIDATING
DISTRIBUTIONS
?Complete liquidation vs,dissolution
?Effects of liquidation on shareholders
?Effects of liquidation on liquidating
corporation
?Liquidation of a controlled subsidiary
?Special shareholder issues
?Debt retirement
3
Complete Liquidation vs,
Dissolution (1 of 3)
?Complete liquidation
–Completely cancel or redeem all of
corp’s stock in accordance with plan
of liquidation OR
–One of a series of distributions in
accordance with plan of liquidation
4
Complete Liquidation vs,
Dissolution (2 of 3)
?Liquidation status
–Corporation ceases to be going concern
–Activities for purpose of winding up its
affairs,paying debts,& distributing
remaining property to shareholders
–Retention of nominal assets does not
alter liquidation status
5
Complete Liquidation vs,
Dissolution (3 of 3)
?Dissolution of corporation
–A legal action that requires corporation
to surrender its charter to the state
–Possible to liquidate corporation without
dissolving it
–Dissolution frees corporate name for use
by others
6
Effects of Liquidation on
Liquidating Shareholders
?Amount of recognized gain or loss
?Character of gain or loss
?Basis of property received by
shareholder
7
Amount of Recognized
Gain/Loss
?Shareholder assumed to have sold
stock for FMV of net assets received
FMV of assets - liabilities received
- Basis of stock surrendered
= Amount of gain (loss) recognized
8
Character of Gain/Loss
?General rule
–Gain or loss treated as capital transaction
?Exceptions
–§ 1244 stock receives ordinary loss
treatment (subject to limitations)
–Losses sustained by a parent in a
worthless stock investment in a controlled
subsidiary receive ordinary loss treatment
9
Basis of Property Received by
Shareholder
?General liquidation rules
–Basis of property received is FMV on
distribution date
–Holding period starts day after
distribution date
10
Effects of Liquidation on
Liquidating Corporation
?Recognition of gains/losses
?Liabilities assumed by shareholders
?Exceptions to general rule
11
Recognition of Gains/Losses
?General rule,
–Both gains & losses recognized
–Tax attributes disappear
12
Liabilities Assumed by
Shareholders
?General rule
–Distributed assets valued at FMV
?Rule when liability exceeds FMV of
related asset distributed
–FMV of related asset cannot be less than
amount of liability assumed or acquired
13
Exceptions to General Rule
(1 of 2)
?Distributions to related parties
–No loss recognized by corp unless
?Property distributed pro rata to all s/h
?Property NOT acquired by capital
contribution or § 351 w/in past five years
–Gains recognized in accordance with
general rule
14
Exceptions to General Rule
(2 of 2)
?Tax-avoidance purpose,
–Losses disallowed if primary purpose
of acquisition of property in § 351
transfer or capital contribution was to
produce losses to offset gains from the
liquidation of other property
?Rule also applies to sales,exchanges,or
other distributions of such property
15
Liquidation of a Controlled
Subsidiary
?Requirements for liquidation of
subsidiary into parent
?Effects of liquidation on shareholders
?Effects of liquidation on subsidiary
16
Requirements for Liquidation
of Subsidiary into Parent (1 of 2)
?Parent owns ? 80%of voting power
AND value of stock
?Must be complete cancellation or
redemption of subsidiary’s stock
?Distribution(s) w/in a single tax year
–Or qualify as one of a series of
distributions completed w/in three
years after year of first distribution
17
Requirements for Liquidation
of Subsidiary into Parent (2 of 2)
?Subsidiary must be solvent
?Nonrecognition does not apply to
minority stockholders
?Nonrecognition does not apply if
parent receives payment to satisfy
subsidiary’s indebtedness to parent
18
Effects of Liquidation on
Shareholders (1 of 2)
?Effects on parent corporation
–Tax attributes carry over to parent
including basis and holding period
–Types of tax attributes
?Potential for depreciation recapture
?NOL carryovers
?Earnings and profits balance
?Capital loss carryovers
?General business & other tax credits
19
Effects of Liquidation on
Shareholders (2 of 2)
?Effects on minority shareholders
–Taxed under general liquidation rules
under § 331
–No carryover of basis or holding
period
20
Effects of Liquidation on
Subsidiary
?Special rule for controlled subsidiary
–No gain or loss recognized when
controlled subsidiary transfers its
assets and liabilities to parent corp
21
Special Shareholder Issues
?Partially liquidating distributions
?Subsequent assessments
?Open versus closed transactions
?Installment obligations
22
Special Corporate
Reporting Issues
?Expenses of the liquidation
–Current expense if for plan of liquidation
–Sales expenses offset sales proceeds
?Treatment of net operating losses
–NOL created in liquidation year may be
carried back
23
Debt Retirement
?Property transferred to a creditor
–If FMV of property = debt obligation
?Corp recognizes gain (loss) if basis in
property is less than (greater than)
amount of obligation
–If FMV of property is < debt obligation
?Corp recognizes forgiveness of debt
income for difference
–Above rules do not apply to
subsidiary debt held by parent
24
Comments or questions about PowerPoint Slides?
Email Richard Newmark at Dr.Newmark@PhDuh.com
