Chapter 8 & 9.pptx - Chapter 8 9 General Liquidation Rules Liquidation of Subsidiaries The End of Corporate Life Ceases to be a going concern

Chapter 8 & 9.pptx - Chapter 8 9 General Liquidation Rules...

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Unformatted text preview: Chapter 8 & 9 General Liquidation Rules & Liquidation of Subsidiaries The End of Corporate Life Ceases to be a going concern Activities are for winding up its affairs Paying off debtors Distributing any remaining assets to shareholders Ways of Liquidation Always pay off creditors first, then distribute assets to shareholders in-kind Sell off its assets for cash or notes, pay off creditors, then distribute cash or notes to shareholders Default Distributions in liquidations, whether in cash or inkind, is taxable under §331 and §336 As opposed to §351 and §1032, non-recognition Last chance to tax unrealized gain on the corporation’s assets; if double-taxation is to prevail Dividends vs. capital gains Tax Consequences to Individual §331 Amounts received by the shareholders in complete liquidation are treated as full payment in exchange for stock If more than one block of shares, allocation is required Basis of property received will be FMV per §334(a) Different Than Dividends E & P no longer relevant in liquidating distributions Shareholder is entitled to a basis offset Series of Liquidation Payments One of a series of distributions Pursuant to a plan Ergo, advisable to adopt a formal plan of complete liquidation Series of distributions Rev. Rul. 85-48 vs. installment sale §453(h) Contingent Payment Over Time Open Transaction doctrine – treat payments first as tax-free recovery of basis and thereafter as capital gain from sale of stock More likely – valuation required; ratable basis recovery over 15 years Corporate Assets Sale; Notes Distribution §453(h) requires the installment obligation be acquired by the corporation from a sale during the 12-month period beginning with the adoption of a complete liquidation plan, and must be completed during the same 12-month period Not for exchange of inventory; unless… Not for related parties Distributions Involving Liabilities Under §331, if the shareholder assume a corporate liability or take liquidation property subject to a liability, the liability will reduce the shareholder’s amount realized If pay debt later, generally gets capital loss treatment instead of a business loss deduction Tax Consequences to Liquidating Corp General rule is that gain or loss shall be recognized to a liquidating corporation on the distribution of property in complete liquidation as if such property is sold at fair market value General Utilities Rule in Liquidation <1986: non-recognition for corporation, but recognition for shareholders >1986: recognition treatment for both corporation and shareholders Except when it comes to loss properties Distributions Involving Liabilities FMV by default; but if liability>FMV Amount realized to the corporation shall be treated as not less than the amount of such liability Treatment of Losses General rule is that the liquidating corporation will be permitted to recognize loss §336(d) vs. §362(e) Recall a §351 exchange - §358 substituted basis in stock for shareholders and §362 substituted basis in property for corporation §362(e) address the double loss concerns Related Person Rule §336(d)(1) To apply: Q1. Is shareholder related? Refer to §267 – owns >50% in value of the outstanding stock of the corporation, or a member of the same control group (50%), and Q2. Is it either non-pro rata distribution or is it a distribution of disqualified property (contributed in a §351 transaction during the five years prior)? Related Person Rule §336(d)(1) (cont’d) §362(e)(2) addresses the built-in loss up front If not, double loss realized – one at corp level and one at shareholder level §336(d)(1) would disallow entire loss when disqualified property is distributed to a related party Anti-Stuffing Rules §336(d)(2) §336(d)(1) is more stringent than §362(e)(2) or §336(d)(2) To apply: Q1. Is property distributed in liquidation acquired in a §351 transaction or as a capital contribution? Q2. Is acquisition a part of a plan to recognize loss (presumption of within two years)? Anti-Stuffing Rules §336(d)(2) (cont’d) If the contributed assets were an integral part of the trade or business, rebuttal is possible Basis adjustment of the distributed property by the excess of the adjusted basis over the FMV of the property immediately after is acquisition by the corporation Disallow only the loss built-in at the time of contribution vs. §336(d)(1) will disallow the entire loss Additional Notes If transaction fits in either (d)(1) or (d)(2), the more stringent provisions of (d)(1) will prevail (d)(2) applies not only to distributions, but also to sales or exchanges of the previously contributed property covered by the rule Entitled to recognize any excess post-contribution loss §362(e)(2) works with aggregate basis vs. §336(d)(2) Liquidation of Subsidiaries Liquidations of subsidiary corporations generally are not taxable to either the subsidiary or parent corporation Effectively is a merger of the subsidiary into the parent corporation §332 is an exception to §331 §337 is an exception to §336 Tax Consequences to the Parent §332 Provides that no gain or loss shall be recognized on the receipt by a corporation of property distributed in complete liquidation of another corp Parent must own at least 80% of total voting power and at least 80% of total value of another corp’s stock Must be in complete cancellation or redemption Tax Consequences to the Parent §332 cont’d Transfer all of its property within the taxable year Or make a series of distributions to a plan of liquidation within three years 80% control has to be at all times – from plan onset to actual distribution Does not apply to an insolvent subsidiary Payments towards indebtedness don’t count Substituted Basis Parent corporation will receive substituted basis for distributed property from subsidiary If gain or loss is recognized by the subsidiary, then basis will be FMV in parent’s hands Parent’s outside basis disappears; congress retains the subsidiary’s inside basis Tax Consequences to Minority §331 Minority shareholders will recognize gain or loss under §331 and take a FMV basis in the assets received under §334(a) Tax Consequences to the Liquidating Sub §337(a) provides that no gain or loss shall be recognized to the liquidating corporation on the distribution to the 80% parent of a §332 liquidation §337(b)(1) provides that any transfer of property in satisfaction of indebtedness to parent, the parent shall not recognize gain or loss Parent takes a transferred basis per §334(b) Also protected by §453(B)(d) installment note Distributions to Minority Shareholders Covered by §336, gain or loss shall be recognized except to the extent provided §336(d)(3) prohibits any loss recognition when gain assets are distributed to the parent and loss assets to minority shareholders ...
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