PORTFOLIO

Corporate Liquidations (Portfolio 784)

Tax Management Portfolio, Corporate Liquidations, No. 784-3rd, analyses the tax considerations in connection with the liquidation of a corporation. The principal focus of the Portfolio is on liquidations after the repeal of the General Utilities doctrine by the Tax Reform Act of 1986. The Portfolio also discusses the tax treatment of liquidations before the repeal of that doctrine.

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DESCRIPTION

Tax Management Portfolio, Corporate Liquidations, No. 784-3rd, analyses the tax considerations in connection with the liquidation of a corporation. The principal focus of the Portfolio is on liquidations after the repeal of the General Utilities doctrine by the Tax Reform Act of 1986. The Portfolio also discusses the tax treatment of liquidations before the repeal of that doctrine.

Addressing liquidations of subsidiaries under §332 (where the parent corporation owns at least 80% of the stock of the subsidiary) as well as liquidations of corporations that do not qualify under §332, the Portfolio considers the tax consequences to both the liquidating corporation and its shareholders. The Portfolio highlights traps for unwary taxpayers and discusses planning opportunities in connection with a corporate liquidation. The Portfolio identifies issues arising in the context of deemed liquidations, and the special problems that can occur as a result of the interplay of the liquidation provisions with the S corporation rules and the consolidated return regulations. The Portfolio also discusses the relationship between the liquidation rules and §338 (the election to treat a stock purchase as a purchase of assets). Finally, the Portfolio reviews the issues arising from the liquidation of insolvent subsidiaries and the existence of intercorporate debt in subsidiary liquidations.


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AUTHORS

LISA M. ZARLENGA
Lisa M. Zarlenga, B.S.B.A., The Ohio State University; J.D., The Ohio State University Moritz College of Law; LL.M. Taxation, Georgetown University Law Center; Former Law Clerk to Hon. Robert P. Ruwe, United States Tax Court; D.C. Bar Taxation Section (Section Chair; Member and Former Chair of the Corporate Tax Committee); American Bar Association Tax Section (Vice Chair, Professional Services Committee; Member, Corporate Tax Committee; Member, Government Relations Committee); frequent speaker and author of various tax articles.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

A. Evolution of the Tax Treatment of Corporate Liquidations

B. Legislative History of the Repeal of the General Utilities Doctrine

1. Overview

2. Reasons for Change

a. Subchapter C Revision Bill of 1985

b. H.R. 3838 - Tax Reform Bill of 1985

C. General

1. Overview

2. Liquidations to which § 332 Applies

3. Liquidations After an Election Under § 338

4. Liquidations to which § 331 Applies

D. Summary of the Statutory Scheme

1. Liquidations of Subsidiaries

a. Section 332 - Tax Consequences to Parent

(1) Parent's Receipt of Property with Respect to Stock Is Nontaxable

(2) Parent's Receipt of Property in Satisfaction of Debt Is Taxable

b. Section 337 - Tax Consequences to Subsidiary

(1) Subsidiary Not Taxable on Distributions to Parent with Respect to Stock

(2) Subsidiary Not Taxable on Transfers in Satisfaction of Debt to Parent

(3) Subsidiary Taxable on Certain Distributions to a Tax-Exempt Parent

c. Section 334(b)(1) - Carryover Basis of Property

d. Section 381(a) - Carryover of Tax Attributes

e. Relation of § 332 to § 338

2. Liquidations of Corporations Other than 80% Owned Corporate Subsidiaries

a. Section 331 - Tax Consequences to Shareholders

b. Section 336 - Tax Consequences to the Liquidating Corporation

c. Section 334 - Shareholders’ Basis in Property Received in Liquidation

II. Basic Requirements of Nontaxable Subsidiary Liquidations

A. General Requirements of § 332

B. Stock Ownership Requirements

1. Ownership of 80% of Both Vote and Value

2. Determination of 80% or More Voting Power

3. Exclusion of Stock which Is Limited and Preferred as to Dividends

4. Effect of Consolidated Return Rules on 80% Stock Ownership

C. Plan of Liquidation

1. Requirement of a Plan

2. Time of Adoption of the Plan

3. Time Limit Imposed on Liquidating Distributions

a. Liquidation Within One Taxable Year

b. “Three-Year” Liquidation

4. Procedural Requirements for a Three-Year Liquidation

a. Waivers and Bonds

b. Failure to File Waiver Not a Forfeiture of § 332

c. Bond

5. Status of Liquidation

6. Completion of Liquidation

D. Distribution Solely of Cash Qualifies as “Property”

E. Limitations of § 337(d)

1. Summary of Statute

2. Transfer to, or Conversion into, a RIC or REIT

3. Loss Disallowance Regulations Under § 337(d)

F. Overlap with § 355

G. Overlap with Reorganization Provisions

III. Subsidiary Liquidations Not Qualifying Under § 332

A. Retroactive Disqualification

1. Consequences of Disqualification to Parent

2. Consequences to Subsidiary

3. Effect of Consolidated Returns

B. Foreign Corporations

1. Outbound Liquidations

2. Inbound Liquidations

C. Insolvent Subsidiary

1. Requirement of Distribution with Respect to Stock

2. Tax Consequences to Parent on Liquidation of Insolvent Subsidiary

a. Parent as Stockholder

b. Parent as Creditor

3. Tax Consequences to Insolvent Subsidiary on Cancellation of Debt in Liquidation

4. Qualification of an Insolvent Subsidiary for a Nontaxable Liquidation

D. Liquidating Distribution to Preferred But Not to Common Stock - Spaulding Bakeries, Inc.

E. Planning to Avoid Qualification Under § 332

1. Determining Whether a Taxable Liquidation Is Advantageous

2. Avoidance of § 332

a. Reduction of Stockholdings

b. Recapitalization

c. Noncompliance with Regulatory Procedural Requirements

d. Delay of Liquidating Distributions Beyond Three Years

e. Rendering Subsidiary Insolvent

IV. Tax Treatment of Intercorporate Debt in a Liquidation of a Subsidiary

A. Subsidiary Indebted to Parent

1. Consequences to Parent of Repayment from Subsidiary

a. Section 332 Does Not Protect Parent from Gain or Loss

b. Consequences Before Liquidation if Parent Acquires Debt from Unrelated Party

c. If § 332 Does Not Apply to the Liquidation

2. Consequences to Subsidiary of Repayment of Debt to Parent

a. Subsidiary Not Taxable if § 332 Applies to the Liquidation

b. Recognition of Gain or Loss to Subsidiary if § 332 Does Not Apply to the Liquidation

c. Application of § 267(f) to Transfers in Satisfaction of Debt

3. Contribution of Subsidiary's Debt to Capital

B. Parent Indebted to Subsidiary

1. Consequences if § 332 Applies to Liquidation

a. Treatment of Parent

b. Treatment of Subsidiary if § 332 Applies

2. Consequences of Subsidiary's Ownership of Parent Debt if § 332 Does Not Apply

a. Treatment of Parent

b. Treatment of Subsidiary

V. Distributions to Minority Shareholders and to Tax-Exempt 80% Distributees

A. Tax Consequences to Minority Shareholders

1. General Rule

2. Reorganization Exception for a Statutory Merger

3. Prior Ownership of Target Stock by Acquirer - Elimination of the “Bausch & Lomb” Rule

4. Application of Collapsible Corporation Rules to Minority Shareholders

5. Elimination of Minority Shareholder Interests

B. Tax Consequences to Liquidating Subsidiary of Distributions to Minority Shareholders

1. Recognition of Gain or Loss

2. Limitation on Recognition of Loss

3. Liquidations Qualifying as Reorganizations

C. Distributions to a Tax-Exempt 80% Distributee

VI. Tax Basis and Holding Period to Parent of Property Received in Liquidation of a Subsidiary

A. General Rule in Nontaxable Liquidation of a Subsidiary

1. Tax Basis

2. Holding Period

3. Character of Assets

B. Nontaxable Liquidation of Subsidiary if § 338 Election Is Made

1. Tax Basis

2. Holding Period

C. Taxable Liquidation of a Subsidiary

1. Tax Basis

2. Holding Period

VII. Miscellaneous Considerations in a Subsidiary Liquidation

A. Carryover of Tax Attributes

1. Section 381

2. Carryovers and De Facto Liquidations

3. Section 382: Limitation on Loss Carryovers and Built-In Losses

4. Section 269(b): Liquidation of Recently Purchased Subsidiary

5. Section 384: Limitations on Use of Built-In Gains of Acquired Subsidiary

6. Section 482: IRS Authority to Reallocate

7. Section 1033: Involuntary Conversions

B. Carrybacks After § 332 Liquidation

C. Deduction of Organizational, Liquidation, and Dissolution Expenses

1. Effect of the Application of § 332

2. Organizational and Similar Expenses

3. Costs of Raising Capital

4. Parent's Expenses in Liquidating Subsidiary

5. Treatment Upon Liquidation of Subsidiary of Parent's Previously Capitalized Cost of Acquiring Subsidiary

6. Subsidiary's Expenses in Redeeming Stock or in Liquidating

7. Expenses of Subsidiary in Assisting or Resisting a Takeover Attempt

a. Capitalization Regulations

b. Prior Law

D. Consolidated Returns - Excess Loss Accounts and Other Issues

1. Excess Loss Accounts

2. Recognition of Gain by Liquidating Subsidiary

3. Inclusion of Transitory Subsidiary in Consolidated Return

4. Succession to Income Tax Liabilities of Subsidiary's Former Consolidated Group

5. Intercompany Sale Followed by Liquidation

6. Intercompany Obligations

7. Application of Unified Loss Rule

E. Qualification of an S Corporation as a Corporate Parent in a § 332 Liquidation

1. Background

2. TAM 9245004

3. Small Business Job Protection Act of 1996

F. Assignment of Income, Reserve for Bad Debts, Recapture, and Installment Obligations

1. Assignment of Income Doctrine and the Tax Benefit Rule

2. Reserve for Bad Debts

3. Recapture of Depreciation - § § 1245 and 1250

4. Recapture of Investment Credit

5. Installment Obligations

G. State Income Taxes

H. Inversion Transactions

I. Distributions of Partnership Interests

J. Deemed Liquidations

1. Qualified REIT Subsidiaries

2. Qualified Subchapter S Subsidiaries

3. Disregarded Entities and Entity Classification

VIII. Liquidations of Corporations Other than 80% Owned Corporate Subsidiaries

A. Distributions of Property in Complete Liquidation

1. Treatment of Liquidating Corporation - General Rule

a. Gain or Loss

b. Information Returns

2. Special Rules - Limitations on Losses

a. Distributions to Related Parties

b. Property Contributed with Tax Avoidance Purpose

3. Treatment of Shareholders - General Rule

a. Gain or Loss

(1) In General

(2) Basis Recovery Rules

(3) Recharacterization Transactions

(4) Installment Obligations

(a) Final Regulation on Installment Obligations Received from Liquidating Corporations

(b) Defined Terms

(c) Coordination With Other Installment Sale Provisions

(d) Special Rules for Accounting for Qualifying Installment Obligations

(e) Liquidating Distributions Treated as Selling Price

(f) Assumption of Liabilities by Shareholders

(g) Installment Obligations Under § 453(h)(1)(E)

(h) Installment Obligations Attributable to Inventory

(i) Installment Obligations Attributable to Certain Property Sales

(j) Distributions Received in More than One Taxable Year

(5) Open Transactions

(6) Related Party Transactions

(7) Character of Gain or Loss

b. Basis of Property Received

c. Consolidated Returns

B. Special Provisions

1. Tax-Free Reorganizations

2. Limitations

a. Statutory and Judicial Exceptions

b. Regulatory Power to Prevent Abuse

(1) RICs and REITs

(2) Partnerships

C. Distributions of Partnership Interests

IX. Coordination with Nonliquidating Distributions

A. Gain or Loss

B. Effect on Earnings and Profits

X. Stock Purchase Treated as Asset Acquisition

A. Section 338 Election by Purchasing Corporation

1. Effect of § 338 Election

a. Treatment of Old Target

b. Treatment of New Target

(1) Basis of Assets

(2) Effect of Liquidation of New Target

(3) New Target as New Corporation or Continuation of Old Target

c. Allocation of Basis and Deemed Sale Price

d. Reporting the Deemed Sale

(1) In General

(2) Section 338(h)(10) Election

e. Treatment of Old Target Shareholders

2. Qualified Stock Purchase

a. In General

b. Purchase

c. 12-Month Acquisition Period

3. Election

a. Express Election

b. Consistency Rules

(1) Asset Consistency Rule

(2) Direct Acquisitions

(3) Indirect Acquisitions

(4) Extension of Consistency Rules to Dividends Qualifying for 100% Dividends Received Deduction

(5) Controlled Foreign Corporations

(6) Stock Consistency Rule

(7) Anti-Avoidance Rules

B. Section 336(e) Election by Selling Corporation

XI. Subchapter S Corporations

A. In General

B. Built-In Gains Tax on S Corporation Conversions

1. Background

2. Application

3. Mechanics of Tax

a. Definitions

b. Imposition of Tax

c. Inventories

d. Transferred and Exchanged Basis Property

e. Contributing Built-In Loss Assets

f. Income Recognition Events

C. Modification of the Subchapter S Rules by the Small Business Job Protection Act of 1996

D. Nonliquidating Distributions of Appreciated Property

E. Liquidating Distributions of Appreciated Property

F. New S Election After Prior Termination

G. Tax Consequences to a Qualified Subchapter “S” Trust

XII. Foreign Investment in Real Property Tax Act

A. In General

B. Nonliquidating Distributions

C. Foreign Corporations Holding United States Real Property

D. Withholding

1. Liquidations of USRPHCs

2. Liquidations of Foreign Corporations

XIII. Collapsible Corporations

XIV. Planning Opportunities

A. Choice of Entity

1. Background

2. New Entities

a. Partnerships

b. S Corporations

c. C Corporations

3. Existing Corporations

B. Pre-Contribution Planning

1. Sale of Property to Corporation

a. Section 1239 - Related Party Sales

b. Section 453(g) - Installment Sales to Related Parties

c. Other Limitations on Installment Sale Benefits

2. Lease of Property to Corporation

C. Partnership Spin-Offs

D. Planning with Appreciated Property

1. Installment Sales

2. Liquidating vs. Nonliquidating Distributions

E. Planning with Depreciated Property

1. Liquidating vs. Nonliquidating Distributions

2. Sale to Shareholders

3. Section 332 Liquidations

F. Planning with Qualified Stock Purchases

1. Section 338 Elections

2. Section 332 Liquidations

G. Mirror Subsidiary Acquisitions

1. Mechanics

2. Revenue Act of 1987

H. Consolidated Return Investment Basis Adjustments

1. “Son of Mirror” Transaction

2. Redemption Through Related Corporation

I. Straddling Tax Years

J. Tax-Free Reorganizations

XV. Tax Returns, Information Requirements, and Other Matters

A. Tax Return of Liquidating Subsidiary - Termination of Taxable Year

B. Information to Be Filed with the IRS

C. Request for Prompt Assessment

D. Employment Taxes

1. FICA Taxes

2. Employment Tax Returns and Statements

E. Request for Ruling

F. Retirement Plans of Liquidated Subsidiary

XVI. Corporate Distributions and Liquidations Before the 1986 TRA

A. The General Utilities Doctrine

1. The Doctrine

2. Early Treasury Regulations

3. The General Utilities Decision

4. Pre-1954 Cases Interpreting General Utilities

B. The 1954 Codification of General Utilities

1. Pre-1986 TRA § 311 - Nonliquidating Distributions

a. In General

b. Statutory Exceptions

(1) LIFO Inventory

(2) Liabilities in Excess of Basis

(3) Installment Obligations

c. Non-Statutory Exceptions

(1) Assignment of Income Doctrine and Tax Benefit Rule

(2) Imputed Sale Doctrine

2. Pre-1986 TRA § 336 - Liquidating Distributions

a. In General

b. Statutory Exceptions

c. Non-Statutory Exceptions

(1) Assignment of Income Doctrine

(2) Tax Benefit Rule

(3) Clear Reflection of Income Doctrine

C. Additional Nonrecognition Provisions

1. Pre-1986 TRA § 337 - Liquidating Sales of Assets

a. Background

b. Mechanics of Pre-1986 TRA § 337

(1) In General

(2) Nonqualifying Property

(3) Exceptions to Nonrecognition

2. Pre-1982 TEFRA § 334(b)(2) and Pre-1986 TRA § 338 - Stock Purchases Treated as Asset Purchases

D. Erosion of the General Utilities Doctrine

1. Sections 1245 and 1250 - Depreciation Recapture

2. Pre-1986 TRA § 311(d) - Nonliquidating Distributions of Appreciated Property

3. Pre-1990 RRA § 47 - Investment Tax Credit Recapture

4. Section 341 - Collapsible Corporations

5. Pre-1982 TEFRA § 346 - Partial Liquidations

6. Other Statutory Exceptions

E. Other Nonrecognition and Deferral Provisions

1. Section 332 - Liquidations of Subsidiaries

2. Pre-1986 TRA § 333 - One-Month Liquidations

a. Effect of Pre-1986 TRA § 333 Election

(1) Gain Recognized

(2) Qualified Electing Shareholder

(3) Earnings and Profits

(4) Basis of Assets Received

b. Requirements for Pre-1986 TRA § 333 Liquidation

(1) In General

(2) Distribution of Assets

XVII. Effective Date of General Utilities Repeal

A. General Rule

B. Transitional Rules

1. Pre-1987 Complete Liquidation

2. Pre-August 1, 1986, Plans of Liquidation

a. Actual Adoption Before August 1, 1986

b. Pre-November 20, 1985, Action

(1) Solicitation of Shareholder Approval

(2) Offer to Purchase Majority of Voting Stock

(3) Ruling Request Submitted

(4) Parent-Subsidiary Relationship

3. Binding Contracts

a. Acquisition of More than 50% Voting Stock or Substantially All the Assets

b. Section 338 - Qualified Stock Purchase

4. Small, Closely-Held Corporations

a. Qualified Corporation

b. Limited Nonrecognition


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 H.R. Rep. No. 99-841 (Conf.), II–198 to II–207 (1986) (Excerpt)

Worksheet 2 H.R. Rep. No. 100-495 (Conf.), 966 (1987) (Excerpt)

Worksheet 3 H.R. Rep. No. 99-426, 274–291 (1985) (Excerpt)

Worksheet 4 House Colloquy on Conference Report on H.R. 3838, the Tax Reform Act of 1986, 132 Cong. Rec. H8358 (daily ed. Sept. 25, 1986) (Excerpt)

Worksheet 5 Senate Colloquy on Conference Report for Tax Reform Act of 1986, 132 Cong. Rec. S13958 (daily ed. Sept. 27, 1986) (Excerpt)

Worksheet 6 Statement of Ways and Means Chairman Rostenkowski on Senate Floor Colloquies Regarding H.R. 3838, the Tax Reform Act of 1986, 132 Cong. Rec. E3389 (daily ed. Oct. 2, 1986) (Excerpt)

Worksheet 7 Senate Colloquy on H. Con. Res. 395, 132 Cong. Rec. S17055 (daily ed. Oct. 17, Part III, 1986) (Excerpt)

Worksheet 8 Letter from Treasury Secretary Baker re Mirror Subsidiary Transactions

Worksheet 9 H.R. Rep. No. 795, (1988) (Excerpt)

Worksheet 10 Checklist for a § 331 Liquidation

Worksheet 11 Illustrative Problem

Worksheet 12 Minutes of Directors Meeting of Christopher Corporation

Worksheet 13 Minutes of Special Meeting of Shareholders of Christopher Corporation

Worksheet 14 Minutes of Special Meeting of the Board of Directors of Christopher Corporation

Worksheet 15 Minutes of Special Meeting of Shareholders of Christopher Corporation

Worksheet 16 Certified Copy of Resolutions of Christopher Corporation

Worksheet 17 Request for Prompt Assessment

Worksheet 18 Checklist of Major Steps in a Subsidiary Liquidation

Worksheet 19 Details Requiring Attention of Parties in a Subsidiary Liquidation

Worksheet 20 RESOLUTIONS OF BOARD OF DIRECTORS [DELAWARE] Resolutions of Board of Directors of a Corporation Adopting a Plan of Complete Liquidation

Worksheet 21 Resolution of Board of Directors of a Parent Corporation (as Sole or Over–80% Stockholder) Authorizing the Implementation of a Subsidiary Liquidation

Worksheet 22 Agreement and Plan of Liquidation and Related Documents [Delaware] Agreement and Plan of Liquidation

Worksheet 23 Miscellaneous Supplementary Forms and Documents [Delaware] Assumption Agreement To Be Filed by Parent Corporation

Worksheet 24 Bill of Sale and Assignment Transferring All Assets to Parent Corporation

Worksheet 25 Waiver of Notice of the Special Meeting of the Board of Directors of XYZ Corporation

Worksheet 26 Minutes of Special Meeting of the Board of Directors of XYZ Corporation

Worksheet 27 Agreement: Plan of Liquidation and Dissolution of XYZ Corporation

Worksheet 28 Resolution of Board of Directors of Parent Corporation (as Over–80% Stockholder) Authorizing Implementation of Subsidiary Liquidation

Worksheet 29 Notice of Special Meeting of Shareholders of XYZ Corporation

Worksheet 30 Affidavit of Mailing Notice

Worksheet 31 Waiver of Notice of Special Meeting of Shareholders of XYZ Corporation

Worksheet 32 Proxy - Special Meeting of Shareholders of XYZ Corporation.

Worksheet 33 Minutes of Special Meeting of Shareholders of XYZ Corporation

Worksheet 34 Certificate of Dissolution of XYZ Corporation Under New York Business Corporation Law

Worksheet 35 Notice of Dissolution Under New York Business Corporation Law

Worksheet 36 Certified Copy of Resolution To Be Attached to IRS Form 966

Worksheet 37 Election to Treat Date Substantially All Properties Distributed Pursuant to a Liquidation as Date Distribution or Transfer Is Completed (Regs. § 1.381(b)–1(b)(2) and (3))

Worksheet 38 Parent Corporation's Statement Regarding Receipt of Liquidating Distribution From Subsidiary (Former Regs. § 1.332–6(b))

Worksheet 39 Parent Corporation's Statement Regarding Receipt of Liquidating Distribution From Subsidiary (Regs. § 1.332–6T)

Bibliography

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Statutes:

Treasury Regulations:

Legislative History:

Treasury Rulings:

Cases:

UNOFFICIAL

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