Chap 16 solutions - 301 Chapter 16 Corporate Distributions...

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© 2011 CCH. All Rights Reserved. Chapter 16 301 Chapter 16 Corporate Distributions in Complete Liquidations SUMMARY OF CHAPTER Chapter 15 discussed ordinary corporate distributions, including distributions of property and stock, as well as stock redemptions and partial liquidations. This chapter discusses the winding up of a corporation’s business affairs followed by a complete liquidation of the corporation. The tax consequences of a complete liquidation of a corporation are examined from the standpoint of the effect on the liquidating corporation and its shareholders. Special rules apply to the liquidation of a controlled subsidiary. Complete Liquidations ¶16,001 Reasons for Liquidation The shareholders of a corporation may wish to liquidate the corporation for a variety of reasons which include: the avoidance of double taxation of business earnings, the avoidance of the personal holding company tax and the accumulated earnings tax, recognition of losses at the shareholder level, and the resolution of a potential buyer’s unwillingness to purchase the corporation’s stock. ¶16,021 Liquidation Status Requirements In order for the liquidation rules to apply, the corporation must be in a status of liquidation. A “status of liquidation” exists if the 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. ¶16,061 Summary of Liquidation Rules A corporate liquidation is generally treated as a taxable exchange. Both the liquidating corporation and its shareholders recognize gain or loss, and the shareholders will have a fair market value basis for any property received. An exception provides for the nontaxable liquidation of an 80-percent-or-more-owned subsidiary. Effect of Complete Liquidation on Corporations ¶16,101 Gain or Loss Recognition A corporation generally recognizes gain or loss on the distribution of property in complete liquidation as if the property were sold to the distributee-shareholder for its fair market value. ¶16,121 Liabilities If property is distributed with a liability and the amount of liability exceeds the property’s fair market value, then the property’s fair market value is treated as not less than the amount of liability for purposes of computing gain on the deemed sale. ¶16,131 Loss Recognition Losses are generally recognized on the distribution or sale or property in complete liquidation. However, special limitations under Code Sec. 336(d)(1) and (d)(2) may apply to limit or completely disallow the amount of loss that can be recognized.
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302 CCH Federal Taxation—Comprehensive Topics Chapter 16 © 2011 CCH. All Rights Reserved. ¶16,141 Expenses of Liquidation The expenses of liquidation, such as accountants’ and attorneys’ fees, are generally deductible. However, expenses incurred in selling assets must be offset against the amounts realized from sale.
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