Chapter 16 Corporate Distributions in Complete Liquidations ©2008 CCH. All Rights Reserved W. Peterson Ave. Chicago, IL

CCH Federal Taxation Comprehensive Topics 2 of 16 Complete Liquidations—Overview Why a complete liquidation? In a complete liquidation, shareholders surrender all of their stock in the corporation and receive their pro rata shares of any remaining assets after all creditors have been paid. Why do this? For any one of several reasons: 1. To avoid double taxation—the corporate tax on earnings, and the tax on dividends received by individual shareholders. 2. To procure cash and other assets for alternative purposes. 3. To sell the corporation’s assets to a buyer unwilling to purchase the stock. Chapter 16, Exhibit 1a

CCH Federal Taxation Comprehensive Topics 3 of To “abandon ship” — future prospects look dismal, and on- going losses cannot provide tax benefits to the corporation or its shareholders without future profits to offset. 5. To recognize capital losses at the shareholder level where, unlike corporations, they are deductible up to $3,000. Moreover, shareholders may wish to use the capital losses to offset capital gains from their personal investments. 6. To avoid corporate penalty taxes such as the personal holding company tax or the accumulated earnings tax. Complete Liquidations—Overview Chapter 16, Exhibit 1b

CCH Federal Taxation Comprehensive Topics 4 of 16  Corporation must be in a status of liquidation.  Corp ceases to be a going concern  Activities are for the purpose of winding up affairs, paying debts, distributing property. Liquidation status Chapter 16, Exhibit 1b

CCH Federal Taxation Comprehensive Topics 5 of 16  Corporation recognizes gain/loss as if property were sold for FMV  If property has a liability attached and it exceeds FMV, then FMV is treated as not less than the liability for calculation of gain.  Losses are recognized, but subject to a few special limitations  Expenses (account/lawyer) are deductible, but expenses of selling asset is deducted from the sale. Liquidation - Corporation Chapter 16, Exhibit 1b

CCH Federal Taxation Comprehensive Topics 6 of 16  Gain/loss calculated by subtracting stock basis from FMV of property received.  Basis is FMV, holding period begins when rec’d  Corporate debts to s/h – if amount rec’d is different from basis of obligation, then gain/loss recognized. Liquidation - Shareholder Chapter 16, Exhibit 1b

CCH Federal Taxation Comprehensive Topics 7 of 16 What is the tax effect to the liquidating corporation and its former shareholders? The answer depends on whether the liquidating corporation is an at least 80% owned subsidiary of a parent corporation or not. Complete Liquidations—Overview Chapter 16, Exhibit 1c

CCH Federal Taxation Comprehensive Topics 8 of 16 If liquidating corporation is NOT an at least 80% owned subsidiary— Gains/Losses are recognized: After the creditors have been paid, the liquidating corporation distributes the remaining assets to its shareholders. The distribution gets exchange treatment, just as if the shareholders had sold their stock. Complete Liquidations—Overview Chapter 16, Exhibit 1d

CCH Federal Taxation Comprehensive Topics 9 of 16 If the liquidating corporation IS an at least 80% owned subsidiary— Gains/Losses are not recognized: Code Sec. 332 provides NON-RECOGNITION of gain or loss on the distribution. The corporate shareholder must own  80% of the subsidiary’s stock, the subsidiary must be solvent, and the liquidation must be completed within 3 years of the close of the taxable year in which the liquidation began. Code Sec. 334(b)(1) provides that the parent’s basis in the assets received is the same as the subsidiary’s former basis. Complete Liquidations—Overview Chapter 16, Exhibit 1e