2009 Pearson Education Inc Publishing as Prentice Hall
© 2009 Pearson Education, Inc. Publishing as Prentice Hall 6 -1
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 ® 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 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 ® 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 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 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 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 ® 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 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 ® 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 © 2009 Pearson Education, Inc. Publishing as Prentice 6 -12
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 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 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 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 ® 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 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 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 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 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 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 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 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 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 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 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 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 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 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 Northern Colorado’s Kenneth W. Monfort College of Business richard. newmark@Ph. Duh. com © 2009 Pearson Education, Inc. Publishing as Prentice Hall 6 -31
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