1. 1 Chapter 6: Corporate Liquidating Distributions

2. 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. 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. 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. 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. 6 Effects of Liquidation on Liquidating Shareholders  Amount of recognized gain or loss  Character of gain or loss  Basis of property received by shareholder  See Table C6-1 for a summary

7. 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. 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. 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. 10 Effects of Liquidation on Liquidating Corporation  Recognition of gains/losses  Liabilities assumed by shareholders  Exceptions to general rule  See Table C6-2 for a summary

11. 11 Recognition of Gains/Losses  General rule:  Both gains & losses recognized  Tax attributes disappear

12. 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. 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. 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. 15 Liquidation of a Controlled Subsidiary  Requirements for liquidation of subsidiary into parent  Effects of liquidation on shareholders  Effects of liquidation on subsidiary

16. 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. 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. 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. 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. 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. 21 Special Shareholder Issues  Partially liquidating distributions  Subsequent assessments against shareholders  Open versus closed transactions  Installment obligations received by a shareholder

22. 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. 23 Debt Retirement (1 of 2)  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

24. 24 Debt Retirement (2 of 2)  Property transferred to a creditor (continued)  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

25. 25 Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard.newmark@PhDuh.com