Ch 6 Flashcards
Special rules: parent corporation liquidates, how does the parent corporation shareholder treat the liquidation?
Holding period
Parent corporation (shareholder) recognizes no gain or loss
Basis and Holding period carries over to parent
General rules: corporate liquidation treatment by share holder
Holding period?
Shareholder Recognizes capital gain/loss equal to excess money
Received and FMV of non cash property over adjusted basis of
Stock
Holding period is day after liquidation date
3 questions asked for determining the tax consequences of liquidation to each of the liquidating corporation’s shareholders
1 what are the amount timing and character of the shareholder’s
Recognized gain or loss?
2 what is the shareholder’s adjusted basis of each property
received?
3 when does the holding period begin for each property received
By the shareholder?
2 questions must be answered to determine the tax consequences of liquidation transaction for the liquidating corporation?
1 what are the amount and character of the corp’s recognized
Gain or loss?
2 what happen’s to the corporation’s tax attributes upon
Liquidation?
Under general rules: when a liquidating corporation recognizes gain or loss on distribution of property to its shareholders, what is it treated the same as?
Recognized gain or loss is same as what corp. would recognize
Had it sold distributed property to shareholders
If the liquidating corporation is an 80% controlled subsidiary of the parent corporations, what special tax rules apply?
The liquidating corporation recognizes no gain or loss
When does liquidation status exist?
When corporation ceases to be a going concern
It activities are to wind up the business, distribute the remaining
Property and pay off debts
How is a distribution taxed before a corporation adopts a plan of liquidation?
Taxed as dividend or capital gain
Dissolution
Legal term implies the corporation has surrendered charter it
Received from the state
Dissolution may never occur if the corporation…
Retains its charter to protect the corporate name from being
acquired by another party
Retention of a nominal amount of assets
Minimum amount required to preserve the corporation’s interest
Under state law
General rule: amount of gain or loss recognized in distribution to shareholder
Shareholders recognized gain or loss =
Money +FMV non cash property -adjusted basis of stock (liquidation)
General rule: in liquidation to shareholders what is the adjusted basis of property received?
When does the holding period begin?
FMV of the property
Holding period begins day after liquidation date
Liquidation to shareholders: what is the character of the gain or loss recognized?
Long term or short term capital loss
Limited ordinary loss treatment available
Controlled subsidiary corporation rule: what is the amount of gain or loss recognized in a liquidation to shareholders?
Parent corporation recognizes no gain or loss when an 80%
Controlled subsidiary corporation liquidates into the parent
Corporation
Controlled subsidiary corporation rule: what is the adjusted basis of property received in liquidation?
What is the holding period?
Carryover basis for property received form subsidiary corporation
Includes subsidiary corp’s holding period for the assets
When stock is acquired, gain/loss must be calculated for…
Each separate time a block of shares is acquired
Character of recognized gain or loss
2 exceptions
Usually capital in character
1 loss recognized by shareholder on sec. 1244 stock is an
Ordinary loss within limits
2 loss recognized by corp. shareholder on worthlessness of
Controlled subsidiary’s stock is an ordinary loss under sec. 165
Basis and holding period of property received in liquidation
Basis is FMV on distribution date
Holding period starts day after distribution date
Liquidating corporations: loss recognition
Liquidating corporations can recognize losses when it distributes property that declines in value
Nonliquidating and liquidating distributions: corporation
Shareholder
Produce similar results for the corporation
Liquidating is treated as a capital gain for shareholder, if it were
nonliquidating it has stronger chance of dividend treatment
The liquidating subsidiary corporation recognizes no gain/loss
Upon distribution of property (when sec. 332 applies to the parent corp.) to…
When is a gain recognized
It’s minority shareholders
When sec. 336d rules apply to the parent corp.
When sec. 332 rules apply, tax attributes of the subsidiary corporation…
Carry over to the parent corporation
The general rule: treatment of liquidating corporation’s tax attributes
Tax attributes disappear when liquidation is completed
Related party rule: amount and character of gain, loss or income recognized
Liquidating subsidiary recognizes no loss upon distribution unless
Corp. distributes property ratably to all shareholders
And liquidating corp. did not acquire property in sec. 351 transaction
Or as capital contribution in 5 years proceeding distribution
Tax avoidance rule: amount and character of gain, loss or income recognized
Liquidating subsidiary recognizes no loss from sale, exchange
Or distribution of property
If property acquired in sec. 351 transaction or as capital
Contribution with principal purpose of loss recognition
Liabilities assumed by shareholders in liquidation, how does a corporation recognize a gain?
FMV of distributed property can’t be less than liabilities assumed
By shareholders in a liquidation, when corp. recognizes gain
Ex. $2.7 million = liability, $2.4 million = adjusted basis, $2.2 million = FMV. corporations recognized gain = $.3 million = 2.7-2.4
Section 332 and section 337 provide that the parent corporation recognizes…
What does this section only apply to?
No gain or loss when a controlled subsidiary corp. liquidates into
It’s parent corp
Only applies to parent corporation, not minority interest shareholders
All 3 requirements that must be met for liquidation to qualify for sec. 332 no recognition rules
1 parent corp. must own 80% voting power and value of all
classes of stock
2 property distribution must be complete cancellation or
redemption of all subsidiary corp.’s stock
3 distribution of property must occur within single tax year or
Be 1 of series of distributions within 3 years
If conditions for sec. 332 aren’t met, how is the liquidation taxed?
Taxed under general liquidation rules
Status of liquidation
Necessary status for corporation to have so its distributions
Are treated as liquidations
Timing of distributions
Either within tax year
or a formal plan is needed if liquidate over 3 year period
Parent corporation that receives a liquidating distribution from an insolvent subsidiary
Section 332 does not apply, because the parent doesn’t distribute
Any assets to redeem the subsidiary’s stock
Ordinary loss is recognized
3 situations where section 332 does not apply
1 parent corporation, receives liquidating distribution from
insolvent subsidiary
2 minority shareholders that receive liquidating distributions
3 parent corporation that receives payment to satisfy subsidiary’s
Indebtedness to parent
Insolvent subsidiary
It’s liabilities exceed FMV of its assets
Treatment of minority shareholders that receive liquidating distributions
Taxed under general liquidation rules sec. 331
Minority shareholder recognizes gain or loss that’s capital
Parents basis in property received in liquidating distribution, 3 things
Same as subsidiary’s basis prior to distribution
The parent’s basis for it’s stock investment in the subsidiary
Corporation is ignored when determining basis of distributed
Property
and disappears once parent surrenders stock in
Subsidiary
Minority shareholder’s basis in property received in liquidating distribution
FMV basis in assets received
Parent corporation that assumes property with depreciation recapture potential in liquidation
Recapture occurs when parent sells or exchanges property
Liquidating distributions to minority shareholders, tax treatment of liquidating corporation
Liquidating corporation must recognize gain, but can’t recognize
Loss
Same treatment as nonliquidating distribution
Tax attributes of the liquidating corporation
Disappear when liquidation is completed under general rules
Carryover when controlled subsidiary is liquidated into its
Parent under sec. 332
4 items in tax attribute carryovers
1 NOL carryovers
2 Earnings and profits
3 capital loss carryovers
4 general business and other tax credit carryovers
When a subsidiary corporation makes a liquidating transfer to a parent, what are the tax consequences?
None, The subsidiary corporation recognizes no gain or loss
4 special shareholder reporting rules that apply to liquidation transactions
1 partially liquidating distributions
2 subsequent assessment
3 open vs. closed transactions
4 installment obligations
Partially liquidating distributions 3 things
Treated as complete liquidation
Shareholder’s basis recovered first, then recognition of gain
Once basis fully recovered
Loss can’t be recognized until final liquidating distribution received
Subsequent assessments, define, what is their tax treatment?
At some date after liquidation, shareholders may be required to
Pay a contingent liability of corp.,
or liability not anticipated at time of liquidating distribution
2) treated as long term capital loss
Open transaction doctrine
Shareholder’s gain or loss from liquidation isn’t determined
Until assets that can’t be valued are sold, collected or able
To be valued
Any assets that can’t be valued are assigned a zero value
Installment obligations
Shareholders who received installment obligations as part of
Their liquidation distribution ordinarily report FMV of obligation
As part of consideration in calculating recognized gain/loss
Liquidating corporation: expenses of liquidation
Corp. can deduct these expenses
Include attorneys’ and accountants’ fees, costs incurred in
Drafting liquidation plan
Liquidating corporation: expenses associated with selling its property
Offset against sales proceeds
Net operating loss: S election
If the liquidating corp. makes an S election in the liquidation yr.
NOL created that year can pass through to shareholders
When a corporation retires a security at an amount different from the shareholder’s adjusted basis for the obligation…
The shareholder recognizes a gain or loss for the difference
The parent corporation recognizes a gain or loss upon receipt of property…
In payment of subsidiary corp. indebtedness if payment differs
From parent’s basis in the debt
