National Tax 432 Chapter 16 Solutions

National Tax 432 Chapter 16 Solutions - StatusofLiquidation...

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Status of Liquidation 1. A status of liquidation exists when a corporation ceases to be a going concern and its activities are merely for the purpose of winding up its affairs, paying its debts, and distributing any remaining balance to its shareholders. Complete Liquidation v. Legal Dissolution 2. A complete liquidation occurs when a corporation ceases normal business operations and its activities are devoted to winding up its affairs, paying its debts, and distributing any remaining assets to its shareholders. In contrast, a legal dissolution is the termination of a corporation’s legal existence under state law. A corporation can be completely liquidated without being legally dissolved. Liquidation: Earnings and Profi ts 3. A corporation’s tax attributes generally disappear in a complete liquidation, except when Sections 332 and 334(b)(1) apply to the liquidation of a subsidiary. Redemption v. Liquidation 4. A liquidating distribution under Code Sec. 331 results in exchange treatment to the shareholder. In a stock redemption under Code Sec. 302, several requirements must be met to avoid dividend treatment and obtain exchange treatment. Arrowsmith Doctrine 7. If, after a liquidation is completed, a shareholder must pay a contingent liability of the corporation or a liability that was unknown at the time of liquidation, then under the Arrowsmith doctrine, the nature of the shareholder’s deduction is dependent on the character of the original gain or loss reported on the liquidation by the shareholder. As a result, the payment will generally be treated as a capital loss. Double Taxation v. Nonrecognition 8. If the corporation has assets that have gone down in value, these losses may be recognized on liquidating sales and (with limitations) liquidating distributions. Liquidation/Reincorporation 9. The IRS may argue that a liquidation and reincorporation are but a single event and constitute a corporate reorganization. Any assets retained by shareholders could be classifi ed as a dividend. Code Sec. 332 Liquidation
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This note was uploaded on 11/22/2011 for the course ACC 432B taught by Professor Wolod during the Fall '11 term at National.

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National Tax 432 Chapter 16 Solutions - StatusofLiquidation...

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