1. 6-1 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

2. 6-2 CORPORATE LIQUIDATING DISTRIBUTIONS  Overview of corporate liquidations  General liquidation rules  Liquidation of a controlled subsidiary  Special reporting issues  Debt retirement  Tax planning considerations  Compliance & procedural procedures Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

3. 6-3 Overview of Corporate Liquidations (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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

4. 6-4 Overview of Corporate Liquidations (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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

5. 6-5 Overview of Corporate Liquidations (Corporate Dissolution)  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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

6. 6-6 General Liquidation Rules Effects of Liquidating on Shareholders  Amount of recognized gain or loss  Character of gain or loss  Basis of property received by shareholder  See Table 1 for a summary Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

7. 6-7 General Liquidation Rules Illustration Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

8. 6-8 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

9. 6-9 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

10. 6-10 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

11. 6-11 General Liquidation Rules Effects of Liquidating on Liquidating Corporation  Recognition of gains/losses  Liabilities assumed by shareholders  Exceptions to general rule  See Table 2 for a summary Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

12. 6-12 Recognition of Gains/Losses  General rule:  Both gains & losses recognized  Tax attributes disappear Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

13. 6-13 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

14. 6-14 Exceptions to General Rule (1 of 3)  Distributions to related parties  No loss recognized by corp unless  Property distributed pro rata to all shareholders AND  Property NOT acquired by capital contribution or §351 within past five years  Gains recognized in accordance with general rule Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

15. 6-15 Exceptions to General Rule (2 of 3)  §362(e)(2) may reduce loss recognition  Loss property contributed to a controlled corp  Corp reduces basis of loss property if total adjusted basis of property contributed exceeds FMV of that property  Results in a corp realizing a smaller loss  Or no loss at all Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

16. 6-16 Exceptions to General Rule (3 of 3)  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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

17. 6-17 Liquidation of a Controlled Subsidiary  Requirements for liquidation of subsidiary into parent  Effects of liquidation on shareholders  Effects of liquidation on subsidiary Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

18. 6-18 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

19. 6-19 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

20. 6-20 Effects of Liquidation 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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

21. 6-21 Effects of Liquidation on Minority Shareholders  Taxed under general liquidation rules under §331  No carryover of basis or holding period Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

22. 6-22 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  Tax attribute carryovers  NOL carryovers  E&P  Capital loss carryovers  General business and other tax credits Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

23. 6-23 Special Reporting Issues Shareholders (1 of 2)  Partially liquidating distributions  If part of liquidation plan, §331 liquidation rules apply  If not, §302 redemption rules apply  Subsequent assessments against shareholders Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

24. 6-24 Special Reporting Issues Shareholders (2 of 2)  Open transaction doctrine  If assets distributed cannot be valued gain or loss from liquidation determined when said assets are sold  Installment obligations received by s/h  May use install method if sale/exchange during liquidation period of ≤ 12 mo. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

25. 6-25 Special Reporting Issues Liquidating Corporation  Expenses of the liquidation  Current expense if for plan of liquidation  Sales expenses offset sales proceeds  Reduce amount realized  Treatment of net operating losses  NOL created in liquidation year may be carried back Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

26. 6-26 Debt Retirement Property Transferred to a Creditor (1 of 2)  If FMV of property = debt obligation  Corp recognizes gain (loss) if basis in property is less than (greater than) amount of obligation Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

27. 6-27 Debt Retirement Property Transferred to a Creditor (2 of 2)  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 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

28. 6-28 Tax Planning Considerations  Timing of liquidation transactions  Recognition of ordinary losses when a liquidation occurs  Obtaining 80% ownership to achieve §332 benefits  Avoiding §332 to recognize losses Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

29. 6-29 Compliance and Procedural Considerations  General liquidation procedures  Form 966  Issue 1099-DIV for distributions  §332 liquidations  Must keep permanent records  Plan of liquidation  Written document Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

30. 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 6-30 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall