Corp. Sol., 2008 Chap.6

Corp. Sol., 2008 Chap.6 - Chapter C:6 Corporate Liquidating...

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Chapter C:6 Corporate Liquidating Distributions Discussion Questions C:6-1 A complete liquidation is defined by Reg. Sec. 1.332-2(c) as one or a series of distributions made by a liquidating corporation that completely cancels or redeems all of its stock in accordance with a plan of liquidation. A partial liquidation is defined by Sec. 302(e) as a distribution that (1) is not essentially equivalent to a dividend (when determined at the corporate level rather than at the shareholder level) and (2) is pursuant to a plan of liquidation and occurs within the tax year in which the plan is adopted or within the succeeding tax year. Generally, a partial liquidation involves the corporation either ceasing to conduct a trade or business (while still continuing to conduct a second trade or business) or contracting its business activities. In either case, the corporation remains in existence after the partially liquidating distribution. A complete liquidation is taxed under Secs. 331 and 336. A partial liquidation is taxed under Secs. 302(b) and 311. The complete liquidation is taxed to the extent the shareholder recognizes a gain or loss, which is computed by comparing the FMV of the property received to the adjusted basis of the stock redeemed. When the shareholder receives a series of liquidating distributions, the distribution is taxed once the FMV of the property received exceeds the adjusted basis of the stock held. All basis is recovered first before the shareholder recognizes any gain. A partial liquidation results in exchange treatment for a noncorporate shareholder under Sec. 302(b)(4). A corporate shareholder is eligible for exchange treatment only if the distribution qualifies as an exchange under the stock redemption rules of Secs. 302(b)(1)-(b)(3). The shareholder recognizes a loss only when he or she receives the final liquidating distribution. pp. C:6-3 through C:6-10. C:6-2 By being an LLC, Summitt can avoid the corporate income tax. Other tax-related reasons for being an LLC include avoiding the shareholder-level tax on C corporation distributions, and passing the entity's losses through to its shareholders. Making the change from a C corporation to an LLC requires the corporation be liquidated. The IRC imposes a tax at the corporate level and again at the shareholder level as the corporation distributes assets to the shareholders and the corporation's existence terminates. The shareholders incur no tax when they contribute the assets to the LLC. Similar corporate and shareholder level taxes would be imposed if the shareholders contributed the Summitt stock to the partnership and then the corporation liquidated into the partnership. The entity would not incur the tax costs of liquidating a C corporation had the business initially been formed as an LLC (instead of a C corporation). If instead, the corporation elected S corporation status, it would incur no tax upon the election. However, it might incur a tax on built-in gains if it sells assets within ten years of
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Corp. Sol., 2008 Chap.6 - Chapter C:6 Corporate Liquidating...

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