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CHAPTER 20 CORPORATIONS: DISTRIBUTIONS IN COMPLETE LIQUIDATION AND AN OVERVIEW OF REORGANIZATIONS LECTURE NOTES LIQUIDATIONS—IN GENERAL 1. In a complete liquidation, the corporation terminates as does the shareholder’s ownership. Liquidations generally produce sale treatment for the corporation and the shareholders. The Liquidation Process 2. Liquidations occur when a corporation ceases to be a going concern. a. Legal dissolution under state law is not required. Rather, courts examine whether it was corporation’s intent to wind up its affairs, pay its obligations, ad distribute remaining assets to shareholders [ Kennemer v. Comm. , 38-1 USTC ¶9297, 21 AFTR 103, 96 F. 2d 177 (CA-5, 1938)]. b. Shareholders may decide to liquidate a corporation because it is unsuccessful, if shareholders want the corporation’s assets, or the corporate assets are sold. Liquidating and Nonliquidating Distributions Compared 3. While losses on nonliquidating distributions are not recognized by the distributing corporation, liquidating distributions may produce recognize losses. 4. Shareholders recognize losses on liquidating distributions even when they are considered related parties under § 267 (owning, directly or indirectly, more than 50% of the stock outstanding). 20-1
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20-2 2009 Comprehensive Volume/Instructor’s Guide with Lecture Notes LIQUIDATIONS—EFFECT ON THE DISTRIBUTING CORPORATIONS General Rule 5. Corporations recognize gain/loss on the distribution of property in a complete liquidation as if the property were sold for its fair market value [§ 336(a)]. a. If property distributed is subject to a liability, the fair market value in the deemed sale cannot be less than the amount of the liability [§ 336(b)]. b. Loss recognition may be limited under the anti-stuffing rules. c. Loss recognition is disallowed for liquidating distributions of a subsidiary corporation pursuant to § 332. Antistuffing Rules 6. Related-Party losses. Restrictions are imposed on the deductibility of losses from distributions to related-parties in the following situations. a. Distribution is not pro rata. b. Property distributed is disqualified property, which is defined as property acquired by the liquidating corporation in a § 351 or contribution to capital transaction, during the five-year period ending on the date of the distribution. 7. Built-in Loss. Losses are disallowed on the distribution or sale of built-in loss property even if the sales involve unrelated parties in the following situations. a. Built-in loss property is defined as property acquired in a § 351 or contribution to capital transaction as part of a plan, the principal purpose of which is to recognize loss by the liquidating corporation. b.
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This note was uploaded on 03/17/2009 for the course ACC 483 taught by Professor Susankuniyoshi during the Spring '08 term at University of Phoenix.

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