Corporate Liquidating Distributions

Front 1

Management may decide to sell part or all of a corporation’s assets prior to a formal liquidation of the company because

Back 1

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

Hint 1

None

Front 2

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

Back 2

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

Hint 2

None

Front 3

The tax costs of liquidating a corporation are

Back 3

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

Front 4

Determining the tax consequences of the liquidation to each of the liquidating corporation’s shareholders entails several questions

Back 4

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?

Hint 4

None

Front 5

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

Back 5

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)

Front 6

If a parent corporation liquidates a controlled subsidiary under special rules, the parent corporation (shareholder) recognizes

Back 6

no gain or loss (the bases and holding periods of the subsidiary’s assets carry over to the parent)

Front 7

Two questions must be answered to determine the tax consequences of the liquidation transaction fro the liquidating corporation

Back 7

What are the amount and character of the corporations recognized gain or loss
What happens to the corporation’s tax attributes upon liquidation?

Hint 7

None

Front 8

Tax attributes, such as net operating loss, carryovers, and earnings and profits, ____ when the corporation liquidates under the general rules

Back 8

disappear

Front 9

If the liquidating corporation is an 80% controlled subsidiary of the parent corporation, the liquidating corporation recognizes _______ under special rules, and the tax attributes ____

Back 9

no gain or loss, carry over to the parent corporation

Front 10

A distribution made before the corporation adopts a plan on liquidation is

Back 10

taxed to the shareholders as a dividend distribution or stock redemption

Front 11

Retention of a nominal amount of assets does/does not prevent a liquidation from occurring under tax rules

Back 11

does not

Front 12

A legal term that implies the corporation has surrendered the charter it received from the state

Back 12

dissolution

Front 13

Section 331(a) requires that liquidating distributions received by a shareholder be treated as

Back 13

full payment in exchange for his stock

Front 14

Under 331(a) the shareholder’s recognized gain or loss of a liquidation equals

Back 14

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

Front 15

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?

Back 15

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

Front 16

Character of gain or loss recognized by the shareholder in a liquidation varies from the General Rule to the Controlled Subsidiary Corporation Rule how?

Back 16

General rule- long-term or short-term capital gain or loss. Ordinary loss treatment available, not applicable to Controlled Subsidiary

Front 17

Adjusted basis of the property received by the shareholder in a liquidation varies from the General Rule to the Controlled Subsidiary Corporation Rule how?

Back 17

General rule- FMV of the property. Controlled Subsidiary- Carryover basis for property received from subsidiary corporation

Front 18

Holding period of the property received by the shareholder in a liquidation varies from the General Rule to the Controlled Subsidiary Corporation Rule how?

Back 18

General Rule- Begins on the day after the liquidation date. Controlled Subsidiary- Includes subsidiary corporation’s holding period for the assets.

Front 19

What is the impact of accounting method on recognition of gain or loss?

Back 19

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

Front 20

When stock is acquired at different times and different per share amounts gain or loss must be calculated

Back 20

separately for each share or block owned

Front 21

Generally the liquidating corporation’s stock is what type of asset, and what type of gain or loss is recognized?

Back 21

capital asset, capital gain or loss

Front 22

Two exceptions to the general rule that the liquidating corporation’s stock is a capital asset is when

Back 22

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

Front 23

With limited exceptions, the liquidating corporation may/may not recognize a loss when it distributes property that has declined in value to its shareholders

Back 23

may

Front 24

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

Back 24

the liquidating corporation recognizes gain or loss when it distributes property as part of a complete liquidation

Front 25

The general rule for the tax consequences of a liquidation to the liquidating corporation concerning the treatment of the liquidating corporations tax attributes is

Back 25

tax attributes disappear when the liquidation is completed

Front 26

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

Back 26

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

Front 27

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

Back 27

tax attributes of a subsidiary corporation carry over to the parent corporation when the Sec 332 rules apply

Front 28

The Related party rule concerning the tax consequences of a liquidation to the liquidating corporation is

Back 28

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

Front 29

The Tax avoidance rule concerning the tax consequences of a liquidation to the liquidating corporation is

Back 29

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

Front 30

Sec 336(d)(1)(a) prevents loss recognition in connection with property distributions to a related person if

Back 30

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

Front 31

Disqualified property defined under section 336 is

Back 31

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

Front 32

To avoid loss disallowance under sec 336(d)(2), a corporation should

Back 32

delay adopting a plan of liquidation until two years after receiving loss property in a sec 351 transaction

Front 33

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

Back 33

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

Front 34

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

Back 34

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

Front 35

What are the tax consequences if the liquidating subsidiary is insolvent?

Back 35

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

Front 36

What bases do both the parent and minority shareholders take in the assets received in a sec 332 liquidation?

Back 36

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

Front 37

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

Back 37

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