Complete Liquidation

Complete liquidation under section 331

1. SH level: Section 331(a): amounts received by SH in complete liquidation are treated as full payment in exchange for the SH’s stock.

   1. The vast majority of SH hold their stock as a capital asset and thus will recognize capital gain or loss.

   2. 334(a) SH’s basis in property received as a result of liquidation shall be FMV of the property

   3. Section 346(a) allows treating a series of distributions as a complete liquidation

2. Corporation level

   1. Section 336: Corporation should recognized gain or loss on the distribution of property as if the property were sold to the distribute at its FMV

      1. Allows loss

      2. Allows losses on liquidating distributions to related parties

      3. limitations

         1. Limitations on distribution to related persons: Section 336(d)(1) no loss shall be recognized by a liquidation corporation on the distribution of property to a Section 267 related person if either (1) the distribution is not pro rata among the SH; or (2) the distributed property was acquired by the liquidating corporation in a Section 351 transaction or as a contribution to capital within last 5 years.

         2. Losses with tax avoidance purpose: Section 336(d) limits the corporation’s deductible loss to the amount that accrued after the corporation acquired the property. Corporation should reduce basis in property by the amount of built-in loss in the property.

         3. Overlap situations: if both 336(d)(1) and (d)(2) apply, use (d)(1)

         4. This not no longer important because 362(e)(2) requires corporation to step down the basis of built-in loss property to FMV when the property is transferred to a corporation.

Liquidation of a subsidiary

3. Parent SH

   1. Non recognition - Section 332: a parent corporation recognizes no gain or loss on the receipt of property in complete liquidation of an 80 percent or more subsidiary if the requirements below are met.

      1. Instead, the parent corporation inherits the subsidiary’s E&P and other tax attributes under section 381(a)(1)

      2. Not available to minority SH

   2. Requirements to qualify under 332

      1. subsidiary distributes property to its parent in complete cancellation or redemption of its stock

      2. Control: Section 332(b)(1) the parent must own at least 80 percent of the total voting power, and 80 percent of the total value of all outstanding stock

      3. Timing: distributions must be within 3 years.

4. ...

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