2009 Pearson Education Inc Publishing as Prentice Hall

  • Slides: 31
Download presentation
© 2009 Pearson Education, Inc. Publishing as Prentice Hall 6 -1

© 2009 Pearson Education, Inc. Publishing as Prentice Hall 6 -1

CORPORATE LIQUIDATING DISTRIBUTIONS (1 of 2) ® Overview of corporate liquidations ® General liquidation

CORPORATE LIQUIDATING DISTRIBUTIONS (1 of 2) ® Overview of corporate liquidations ® General liquidation rules ® Liquidation of a controlled subsidiary ® Special shareholder issues ® Special corporate issues © 2009 Pearson Education, Inc. Publishing as Prentice 6 -2

CORPORATE LIQUIDATING DISTRIBUTIONS (2 of 2) ® Debt retirement ® Tax planning considerations ®

CORPORATE LIQUIDATING DISTRIBUTIONS (2 of 2) ® Debt retirement ® Tax planning considerations ® Compliance & procedural considerations © 2009 Pearson Education, Inc. Publishing as Prentice 6 -3

Overview of Corporate Liquidations (Complete Liquidation) ® Completely cancel or redeem all of corp’s

Overview of Corporate Liquidations (Complete Liquidation) ® Completely cancel or redeem all of corp’s stock in accordance with plan of liquidation OR ® One of a series of distributions in accordance with plan of liquidation © 2009 Pearson Education, Inc. Publishing as Prentice 6 -4

Overview of Corporate Liquidations (Liquidation Status) ® Corporation ceases to be going concern ®

Overview of Corporate Liquidations (Liquidation Status) ® Corporation ceases to be going concern ® Activities for purpose of winding up its affairs, paying debts, & distributing remaining property to shareholders ® Retention of nominal assets does not alter liquidation status © 2009 Pearson Education, Inc. Publishing as Prentice 6 -5

Overview of Corporate Liquidations (Corporate Dissolution) ®A legal action that requires corporation to surrender

Overview of Corporate Liquidations (Corporate Dissolution) ®A legal action that requires corporation to surrender its charter to the state ® Possible to liquidate corporation without dissolving it ® Dissolution frees corporate name for use by others © 2009 Pearson Education, Inc. Publishing as Prentice 6 -6

General Liquidation Rules Effects of Liquidating on Shareholders ® Amount of recognized gain or

General Liquidation Rules Effects of Liquidating on Shareholders ® Amount of recognized gain or loss ® Character of gain or loss ® Basis of property received by shareholder ® See Table C 6 -1 for a summary © 2009 Pearson Education, Inc. Publishing as Prentice 6 -7

Amount of Recognized Gain/Loss ® Shareholder assumed to have sold stock for FMV of

Amount of Recognized Gain/Loss ® Shareholder assumed to have sold stock for FMV of net assets received FMV of assets - liabilities received - Basis of stock surrendered = Amount of gain (loss) recognized © 2009 Pearson Education, Inc. Publishing as Prentice 6 -8

Character of Gain/Loss ® General Gain rule or loss treated as capital transaction ®

Character of Gain/Loss ® General Gain rule or loss treated as capital transaction ® Exceptions § 1244 stock receives ordinary loss treatment (subject to limitations) Losses sustained by a parent in a worthless stock investment in a controlled subsidiary receive ordinary loss treatment © 2009 Pearson Education, Inc. Publishing as Prentice 6 -9

Basis of Property Received by Shareholder ® General liquidation rules Basis of property received

Basis of Property Received by Shareholder ® General liquidation rules Basis of property received is FMV on distribution date Holding period starts day after distribution date © 2009 Pearson Education, Inc. Publishing as Prentice 6 -10

General Liquidation Rules Effects of Liquidating on Liquidating Corporation ® Recognition of gains/losses ®

General Liquidation Rules Effects of Liquidating on Liquidating Corporation ® Recognition of gains/losses ® Liabilities assumed by shareholders ® Exceptions to general rule ® See Table C 6 -2 for a summary © 2009 Pearson Education, Inc. Publishing as Prentice 6 -11

Recognition of Gains/Losses ® General rule: Both gains & losses recognized Tax attributes disappear

Recognition of Gains/Losses ® General rule: Both gains & losses recognized Tax attributes disappear © 2009 Pearson Education, Inc. Publishing as Prentice 6 -12

Liabilities Assumed by Shareholders ® General rule Distributed assets valued at FMV ® Rule

Liabilities Assumed by Shareholders ® General rule Distributed assets valued at FMV ® Rule when liability exceeds FMV of related asset distributed FMV of related asset cannot be less than amount of liability assumed or acquired © 2009 Pearson Education, Inc. Publishing as Prentice 6 -13

Exceptions to General Rule (1 of 3) ® Distributions No to related parties loss

Exceptions to General Rule (1 of 3) ® Distributions No to related parties loss recognized by corp unless ¬Property distributed pro rata to all shareholders ¬Property NOT acquired by capital contribution or § 351 within past 5 years Gains recognized in accordance with general rule © 2009 Pearson Education, Inc. Publishing as Prentice 6 -14

Exceptions to General Rule (2 of 3) ® § 362(e)(2) Loss may reduce loss

Exceptions to General Rule (2 of 3) ® § 362(e)(2) Loss may reduce loss recognition property contributed to a controlled corp ¬Corp reduces basis of loss property if total adjusted basis of property contributed exceeds FMV of that property Results ¬Or in a corp realizing a smaller loss no loss at all © 2009 Pearson Education, Inc. Publishing as Prentice 6 -15

Exceptions to General Rule (3 of 3) ® Tax-avoidance purpose: Losses disallowed if primary

Exceptions to General Rule (3 of 3) ® Tax-avoidance purpose: Losses disallowed if primary purpose of acquisition of property in § 351 transfer or capital contribution was to produce losses to offset gains from the liquidation of other property ¬Rule also applies to sales, exchanges, or other distributions of such property © 2009 Pearson Education, Inc. Publishing as Prentice 6 -16

Liquidation of a Controlled Subsidiary ® Requirements for liquidation of subsidiary into parent ®

Liquidation of a Controlled Subsidiary ® Requirements for liquidation of subsidiary into parent ® Effects of liquidation on shareholders ® Effects of liquidation on subsidiary © 2009 Pearson Education, Inc. Publishing as Prentice 6 -17

Requirements for Liquidation of Subsidiary into Parent (1 of 2) owns 80% of voting

Requirements for Liquidation of Subsidiary into Parent (1 of 2) owns 80% of voting power AND value of stock ® Must be complete cancellation or redemption of subsidiary’s stock ® Distribution(s) w/in a single tax year ® Parent Or qualify as one of a series of distributions completed w/in 3 years after year of first distribution © 2009 Pearson Education, Inc. Publishing as Prentice 6 -18

Requirements for Liquidation of Subsidiary into Parent (2 of 2) ® Subsidiary must be

Requirements for Liquidation of Subsidiary into Parent (2 of 2) ® Subsidiary must be solvent ® Nonrecognition does not apply to minority stockholders ® Nonrecognition does not apply if parent receives payment to satisfy subsidiary’s indebtedness to parent © 2009 Pearson Education, Inc. Publishing as Prentice 6 -19

Effects of Liquidation on Shareholders (1 of 2) ® Effects on parent corporation Tax

Effects of Liquidation on Shareholders (1 of 2) ® Effects on parent corporation Tax attributes carry over to parent including basis and holding period Types of tax attributes ¬Potential for depreciation recapture ¬NOL carryovers ¬Earnings and profits balance ¬Capital loss carryovers ¬General business & other tax credits © 2009 Pearson Education, Inc. Publishing as Prentice 6 -20

Effects of Liquidation on Shareholders (2 of 2) ® Effects on minority shareholders Taxed

Effects of Liquidation on Shareholders (2 of 2) ® Effects on minority shareholders Taxed under general liquidation rules under § 331 No carryover of basis or holding period © 2009 Pearson Education, Inc. Publishing as Prentice 6 -21

Effects of Liquidation on Subsidiary ® Special rule for controlled subsidiary No gain or

Effects of Liquidation on Subsidiary ® Special rule for controlled subsidiary No gain or loss recognized when controlled subsidiary transfers its assets and liabilities to parent corp Tax attribute carryovers ¬NOL carryovers ¬E&P ¬Capital loss carryovers ¬General business and other tax credits © 2009 Pearson Education, Inc. Publishing as Prentice 6 -22

Special Shareholder Issues (1 of 3) ® Partially liquidating distributions If part of liquidation

Special Shareholder Issues (1 of 3) ® Partially liquidating distributions If part of liquidation plan, § 331 liquidation rules apply If not, § 302 redemption rules apply ® Subsequent assessments against shareholders © 2009 Pearson Education, Inc. Publishing as Prentice 6 -23

Special Shareholder Issues (2 of 3) ® Open transaction doctrine If assets distributed cannot

Special Shareholder Issues (2 of 3) ® Open transaction doctrine If assets distributed cannot be valued gain or loss form liquidation determined when said assets are sold © 2009 Pearson Education, Inc. Publishing as Prentice 6 -24

Special Shareholder Issues (3 of 3) ® Installment obligations received by a shareholder May

Special Shareholder Issues (3 of 3) ® Installment obligations received by a shareholder May use installment method if sale or exchange takes place during liquidation period of 12 months or less © 2009 Pearson Education, Inc. Publishing as Prentice 6 -25

Special Corporate Issues ® Expenses of the liquidation Current expense if for plan of

Special Corporate Issues ® Expenses of the liquidation Current expense if for plan of liquidation Sales expenses offset sales proceeds ® Treatment of net operating losses NOL created in liquidation year may be carried back © 2009 Pearson Education, Inc. Publishing as Prentice 6 -26

Debt Retirement (1 of 2) ® Property If transferred to a creditor FMV of

Debt Retirement (1 of 2) ® Property If transferred to a creditor FMV of property = debt obligation ¬Corp recognizes gain (loss) if basis in property is less than (greater than) amount of obligation © 2009 Pearson Education, Inc. Publishing as Prentice 6 -27

Debt Retirement (2 of 2) ® Property transferred to a creditor (continued) If FMV

Debt Retirement (2 of 2) ® Property transferred to a creditor (continued) If FMV of property is < debt obligation ¬Corp recognizes forgiveness of debt income for difference Above rules do not apply to subsidiary debt held by parent © 2009 Pearson Education, Inc. Publishing as Prentice 6 -28

Tax Planning Considerations ® Timing of liquidation transactions ® Recognition of ordinary losses when

Tax Planning Considerations ® Timing of liquidation transactions ® Recognition of ordinary losses when a liquidation occurs ® Obtaining 80% ownership to achieve § 332 benefits ® Avoiding § 332 to recognize losses © 2009 Pearson Education, Inc. Publishing as Prentice 6 -29

Compliance and Procedural Considerations ® General liquidation procedures Form 966 Issue 1099 -DIV for

Compliance and Procedural Considerations ® General liquidation procedures Form 966 Issue 1099 -DIV for distributions ® § 332 liquidations Must ® Plan keep permanent records of liquidation Written document © 2009 Pearson Education, Inc. Publishing as Prentice 6 -30

Comments or questions about Power. Point Slides? Contact Dr. Richard Newmark at University of

Comments or questions about Power. Point Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard. [email protected] Duh. com © 2009 Pearson Education, Inc. Publishing as Prentice Hall 6 -31