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37 Cards in this Set

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Management may decide to sell part or all of a corporation’s assets prior to a formal liquidation of the company because
They wish to dispose of assets the shareholders may not want to receive in a liquidating distribution,
OR to obtain cash that can be used to pay liabilities
OR to lessen the amount of taxes paid
None
Management may decide to sell part or all of a corporation’s assets prior to a formal liquidation of the company for tax reasons because
they may wish to use the individual tax rate instead of the corporate tax rate,
OR to deduct the losses on personal tax returns,
OR to eliminate double taxation of subsequent earnings
None
The tax costs of liquidating a corporation are
The liquidating corporation is taxed as though it sold its assets, and the shareholders receiving liquidating distributions are taxed as if they sold their stock
Determining the tax consequences of the liquidation to each of the liquidating corporation’s shareholders entails several questions
What are the amount, timing and character of the shareholder’s recognized gain or loss?
What is the shareholder’s adjusted basis of each property received?
When does the holding period begin for each property received by the shareholder?
None
When a corporation liquidates under general rules, a shareholder treats the liquidating distribution as an amount received in exchange for his stock. The shareholder recognizes
capital gain or loss equal to the excess of any money received plus the FMV of any nonmonetary property received over the adjusted basis of his stock (the basis of each property received is stepped-up or stepped down to the property’s FMV on the liquidation date)
If a parent corporation liquidates a controlled subsidiary under special rules, the parent corporation (shareholder) recognizes
no gain or loss (the bases and holding periods of the subsidiary’s assets carry over to the parent)
Two questions must be answered to determine the tax consequences of the liquidation transaction fro the liquidating corporation
What are the amount and character of the corporations recognized gain or loss
What happens to the corporation’s tax attributes upon liquidation?
None
Tax attributes, such as net operating loss, carryovers, and earnings and profits, ____ when the corporation liquidates under the general rules
disappear
If the liquidating corporation is an 80% controlled subsidiary of the parent corporation, the liquidating corporation recognizes _______ under special rules, and the tax attributes ____
no gain or loss, carry over to the parent corporation
A distribution made before the corporation adopts a plan on liquidation is
taxed to the shareholders as a dividend distribution or stock redemption
Retention of a nominal amount of assets does/does not prevent a liquidation from occurring under tax rules
does not
A legal term that implies the corporation has surrendered the charter it received from the state
dissolution
Section 331(a) requires that liquidating distributions received by a shareholder be treated as
full payment in exchange for his stock
Under 331(a) the shareholder’s recognized gain or loss of a liquidation equals
the difference between the amount realized (the FMV of assets received from the corporation plus any money) and his or her basis in the stock. If liabilities are assumed, the amount of these liabilities reduces the amount realized
The Amount of Gain or loss Recognized by the shareholder in a liquidation varies from the General Rule to the Controlled Subsidiary Corporation Rule how?
General rule- shareholders recognized gain or loss upon liquidation (money + FMV property-adjusted basis) Controlled Subsidiary- recognizes no gain or loss when an 80% controlled subsidiary liquidates into the parent
Character of gain or loss recognized by the shareholder in a liquidation varies from the General Rule to the Controlled Subsidiary Corporation Rule how?
General rule- long-term or short-term capital gain or loss. Ordinary loss treatment available, not applicable to Controlled Subsidiary
Adjusted basis of the property received by the shareholder in a liquidation varies from the General Rule to the Controlled Subsidiary Corporation Rule how?
General rule- FMV of the property. Controlled Subsidiary- Carryover basis for property received from subsidiary corporation
Holding period of the property received by the shareholder in a liquidation varies from the General Rule to the Controlled Subsidiary Corporation Rule how?
General Rule- Begins on the day after the liquidation date. Controlled Subsidiary- Includes subsidiary corporation’s holding period for the assets.
What is the impact of accounting method on recognition of gain or loss?
accrual method recognizes when all events have occurred that fix the amount of the liquidating distribution and the time the shareholders are entitled to receive the distribution upon surrender of their shares, cash method reports the gain or loss when they have constructive receipt
When stock is acquired at different times and different per share amounts gain or loss must be calculated
separately for each share or block owned
Generally the liquidating corporation’s stock is what type of asset, and what type of gain or loss is recognized?
capital asset, capital gain or loss
Two exceptions to the general rule that the liquidating corporation’s stock is a capital asset is when
loss recognized by an individual shareholder on sec 1244 stock is an ordinary loss within limits, and loss recognized by a corporate shareholder on the worthlessness of the controlled subsidiary’s stock is an ordinary loss under 165
With limited exceptions, the liquidating corporation may/may not recognize a loss when it distributes property that has declined in value to its shareholders
may
The general rule for the tax consequences of a liquidation to the liquidating corporation concerning the amount and character of gain, loss, or income recognized is
the liquidating corporation recognizes gain or loss when it distributes property as part of a complete liquidation
The general rule for the tax consequences of a liquidation to the liquidating corporation concerning the treatment of the liquidating corporations tax attributes is
tax attributes disappear when the liquidation is completed
The controlled subsidiary corporation rules for the tax consequences of a liquidation to the liquidating corporation concerning the amount and character of gain, loss, or income recognized is
1. the liquidating subsidiary corporation recognizes no gain or loss upon a distribution of property to its parent corporation when the Sec 332 nonrecognition rules apply to the parent corporation 2. The liquidating subsidiary corporation recognizes no loss upon a distribution of property to minority shareholders when the sec 332 nonrecognition rules apply to the parent corporation. It does recognize gains
The controlled subsidiary corporation rule for the tax consequences of a liquidation to the liquidating corporation concerning the treatment of the liquidating corporations tax attributes is
tax attributes of a subsidiary corporation carry over to the parent corporation when the Sec 332 rules apply
The Related party rule concerning the tax consequences of a liquidation to the liquidating corporation is
the liquidating subsidiary corporation recognizes no loss upon a distribution of property to a related person unless the corporation distributes such property ratably to all shareholders and the liquidating corporation did not acquire the property in a sec 351 transaction or as a capital contribution during the five years preceding the distribution
The Tax avoidance rule concerning the tax consequences of a liquidation to the liquidating corporation is
the liquidating subsidiary corporation recognizes no loss when a sale, exchange or distribution of property occurs and the liquidating corporation acquired such property in a sec 351 transaction or as a capital contribution having as a principal purpose the recognition of loss
Sec 336(d)(1)(a) prevents loss recognition in connection with property distributions to a related person if
1. The distribution of loss property is other than pro rata to all shareholders based on their stock ownership or 2. the distributed property is disqualified property
Disqualified property defined under section 336 is
1) any property acquired by the liquidating corporation in a transaction to which sec 351 applies, or as a contribution to capital, during the five-year period ending on the distribution date or 2) any property having an adjusted basis that carries over from disqualified property
To avoid loss disallowance under sec 336(d)(2), a corporation should
delay adopting a plan of liquidation until two years after receiving loss property in a sec 351 transaction
All of these requirements must be met for a liquidation to qualify for the sec 332 nonrecognition rules and if these rules are met then sec 332 nonrecognition rules are MANDADORY
1) the parent corporation ust own at least 80% of the total combined voting power of all classes of stock entitled to vote and 80% of the total value of all classes of stock from the date from which the plan is adopted until recipt of the subsidiary corporation’s property 2) the property distribution must be in complete cancellation or redemption of all the subsidiary corporation’s stock 3) distribution of the property must occur within a single tax year or be one of a series of distributions competed within three years of the close of the tax year during which the subsidiary makes the first of the series of liquidating distributions
Sec 332(a) nonrecognition rules only apply to a parent corporation that receives a liquidating dividend from a solvent subsidiary. It does not apply to
a parent corporation that receives a liquidating distribution from an insolvent subsidiary, to minority shareholders who receive liquidating distributions, or to a parent corporation that receives a liquidating distribution from an insolvent subsidiary, to minority shareholders who receive liquidating distributions or to a parent corporation that receives a payment to satisfy the subsidiary’s indebtedness to the parent
What are the tax consequences if the liquidating subsidiary is insolvent?
The parent generally is entitled to an ordinary loss deduction under 165 (g)(3) when it fails to receive any liquidation proceeds because the subsidiary is insolvent. The parent may also have a bad debt reduction under sec 166
What bases do both the parent and minority shareholders take in the assets received in a sec 332 liquidation?
Because the parent corporation recognizes no gain or loss in the transaction, the parent corporation takes a carryover basis in its assets. However, because the minority shareholders are involved in a taxable exchange, they take a FMV basis in their assets
The 2004 jobs act added a special rule to prevent the importation of built in losses from foreign companies, the parent takes a FMV basis in each transferred property if these three conditions prevail
1) the parent is a US corporation 2) the liquidating subsidiary is a foreign corporation 3) the aggregate adjusted basis of the transferred property exceeds the aggregate FMV