Chapter 20 Flashcards
Liquidations—In General
• Corporation winds up affairs, pays debts, and distributes remaining assets to shareholders
– Produces sale or exchange treatment to shareholder
– Liquidating corporation recognizes gains and losses upon distribution of its assets, with certain exceptions
Liquidations—Effect on Corporation (slide 1 of 3)
• Gain or loss is recognized by corporation on distribution in complete liquidation
– Loss may be disallowed or limited if:
• Property distributed to related parties
• Property distributed has built-in losses
• A subsidiary’s liquidating distribution to its parent corporation or to its minority shareholders
– Property treated as if sold for FMV
– Result: Liquidating distribution subject to corporate level tax (gain), and shareholder level tax (receipt of proceeds)
Liquidations—Effect on Corporation (slide 1 of 3)
• Gain or loss is recognized by corporation on distribution in complete liquidation
– Loss may be disallowed or limited if:
• Property distributed to related parties
• Property distributed has built-in losses
• A subsidiary’s liquidating distribution to its parent corporation or to its minority shareholders
– Property treated as if sold for FMV
– Result: Liquidating distribution subject to corporate level tax (gain), and shareholder level tax (receipt of proceeds)
Liquidations—Effect on Corporation (slide 2 of 3)
• Limitations on losses—Related Party Situations
– Losses are disallowed on liquidating distributions to related parties if:
• Distribution is not pro rata
– In pro rata distributions, each shareholder receives their share of each asset
• Property distributed is disqualified property
– Disqualified property is property acquired by corp in a §351 transaction during the five-year period ending on date of distribution
Liquidations—Effect on Corporation (slide 3 of 3)
• Limitations on losses—Built-in Loss Situations
– Losses are disallowed when property distributed was acquired in a §351 transaction and principal purpose was to cause recognition of loss by corp on liquidation
– Purpose is presumed if transfer occurs within two years of adopting liquidation plan
Liquidations—Effect on Shareholder (slide 1 of 2)
• Gain or loss recognized on receipt of property from liquidating corporation
– Amount = FMV of property received - basis in stock
• Generally, capital gain or loss
– Basis in assets received in liquidating distribution = FMV on date of distribution
Liquidations—Effect on Shareholder (slide 2 of 2)
– Special rule for installment obligations
• Shareholder may defer gain recognition to point of collection
• Corporation must recognize all gain on distribution
Liquidations: Parent-Subsidiary Situations (slide 1 of 4)
• Parent corporation does not recognize gain or loss on liquidation of subsidiary
– Also, subsidiary recognizes no gain or loss on property distributions to its parent
Liquidations: Parent-Subsidiary Situations (slide 2 of 4)
• To qualify:
– Parent must own at least 80% of voting stock and value of subsidiary’s stock
– Subsidiary must distribute all property in complete cancellation of all its stock within the taxable year or within 3 years from the close of tax year in which first distribution occurred
– Subsidiary must be solvent
Liquidations: Parent-Subsidiary Situations (slide 3 of 4)
• Liquidating distributions to minority shareholders
– Subsidiary corporation treated same way as in nonliquidating distribution
• Distributing corp recognizes gain but not loss
– Minority shareholders recognize gain or loss
• Amount = FMV of property received - basis in stock
Liquidations: Parent-Subsidiary Situations (slide 4 of 4)
• Basis of property received by parent
– Has same basis as subsidiary’s basis (unless election is made under §338)
• Parent’s basis in subsidiary’s stock disappears
• Parent acquires tax attributes of subsidiary.
– e.g., NOLs, business credit carryovers, capital loss carryovers, subsidiary’s E & P
• May result in some inequities
Election Under §338 (slide 1 of 4)
• Parent may elect to treat acquisition of stock in acquired corp as a purchase of the acquired corp.’s assets if:
– Election is made by fifteenth day of ninth month following qualified stock purchase
• Qualified stock purchase occurs when corp acquires stock representing at least 80% of voting power and value within a 12-month period
• Must be acquired in taxable transaction
– Stock purchases by affiliated group members count
Election Under §338(slide 2 of 4)
• Tax Consequences
– Parent corp. has basis in subsidiary’s assets = basis in subsidiary’s stock
• Subsidiary may, but need not, be liquidated
Election Under §338(slide 3 of 4)
• Tax Consequences (cont’d)
– Subsidiary is deemed to have sold its assets for an amount determined with reference to parent’s basis in subsidiary’s stock, adjusted for liabilities of subsidiary
Election Under §338(slide 4 of 4)
• Tax Consequences (cont’d)
– Gain or loss is recognized by subsidiary
– Subsidiary is treated as a new corporation that purchased all of its assets on the day after the qualified stock purchase date
Reorganizations—In General
• Refers to any corporate restructuring that may be tax-free under §368
– To qualify, must meet certain general requirements:.
• Must have a plan of reorganization
• Must meet continuity of interest and continuity of business enterprise tests
• Must have a sound business purpose
•Step transaction doctrine should not apply to the reorganization
Summary of Different Types of Reorganizations
• The term reorganization includes:
– Type A: Statutory merger or consolidation
– Type B: Stock for stock exchange
– Type C: Stock for assets exchange
– Type D: Divisive exchange
– Type E: Recapitalization
– Type F: Change in identity, form, or place of organization
– Type G: Transfers in bankruptcy or receivership
Tax Free Reorganization Consequences, in General (slide 1 of 3)
• Consequences to Acquiring Corporation
– No gain or loss recognized unless it transfers property to the target corporation as part of the transaction
• Then gain, but not loss, may be recognized
– Basis of property received retains basis it had in hands of target corp. plus any gain recognized by the target
Tax Free Reorganization Consequences, in General (slide 2 of 3)
• Consequences to Target Corporation
– No gain or loss unless it retains “other property” received in the exchange or it distributes its own property to shareholders
• Other property is defined as anything received other than stock or securities
– Treated as boot
• Gain, but not loss, may be recognized
Tax Free Reorganization Consequences, in General (slide 3 of 3)
• Consequences to Target or Acquiring Co. Shareholders
– No gain or loss unless shareholders receive cash or other property in addition to stock
• Cash or other property is considered boot
– Gain recognized by the stockholder is the lesser of the boot received or the realized gain
– Basis of shares received is same as basis of those surrendered, decreased by boot received, increased by gain and dividend income, if any, recognized in the transaction
E & P impacts the gain or loss to be recognized by the shareholder in a liquidating distribution but not in a nonliquidating distribution.
True
False
False
E & P has no impact on the gain or loss to be recognized by the shareholder in either type of distribution.
Under § 336(a), a corporation recognizes gain or loss on the distribution of property in a complete liquidation as if the property were sold at its fair market value.
True
False
True
This treatment is consistent with the notion of double taxation that is inherent in operating a business as a C corporation—once at the corporate level and again at the shareholder level.
During the current year, Crow Corporation is liquidated and distributes its only asset, land, to Cody, the sole shareholder. On the date of distribution, the land has a basis of $300,000, has a fair market value of $650,000, and is subject to a liability of $400,000. Cody, who takes the land subject to the liability, has a basis of $75,000 in the Crow stock. With respect to the distribution of the land, which of the following statements is correct?
a. Cody has a basis of $250,000 in the land.
b. Cody recognizes a gain of $175,000.
c. Cody has a basis of $300,000 in the land.
d. Cody recognizes a gain of $575,000.
e. Crow Corporation recognizes a gain of $100,000.
B
In a complete liquidation, a shareholder recognizes gain equal to the difference between the fair market value of property received from the corporation and the basis of the stock surrendered. When property is received subject to a liability, such liability reduces the amount realized by the shareholder. Thus, Cody recognizes a gain of $175,000 [$250,000 (net fair market value of land) – $75,000 (basis in Crow stock)]. Crow recognizes a gain of $350,000 [$650,000 (fair market value) – $300,000 (basis)] on the distribution of land. Cody’s basis in the land is its fair market value on the date of the distribution, or $650,000.
The liquidation of a subsidiary generally is a nontaxable transaction.
True
False
True
The liquidation of a subsidiary generally is a nontaxable transaction resulting in the nonrecognition of gain or loss for both the parent and the subsidiary corporations and the carryover of the subsidiary’s asset bases (and other tax attributes).