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Corporate Org Cap Structure


  • pg 1
									                   Chapter 6

              Corporate Liquidating

Transparency 6-1
        Complete Liquidation
• “Complete liquidation” is not defined
  but must either
• completely cancel or redeem all of a
  corporation’s stock in accordance
  with a plan of liquidation or
• be one of a series of distributions in
  accordance with a plan of liquidation.

Transparency 6-2
              Liquidation Status
• Corporation ceases to be a going
• Activities are for the purpose of
  winding up its affairs, paying its
  debts, and distributing any remaining
  property to shareholders.
• Retention of nominal assets does not
  alter the liquidation status.

Transparency 6-3
  Dissolution of the Corporation

• Dissolution is a legal action that
  requires the corporation to surrender
  its charter to the state.
• It is possible to liquidate a
  corporation but never dissolve it.
• Dissolution frees the corporate name
  for use by others.

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    General Liquidation Rules

• General liquidation rules are divided
  into two parts
   – the effects of liquidation on the
     shareholders and
   – the effects of liquidation on the

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          Effects of Liquidation on
• Amount of recognized gain or loss
• Character of gain or loss
• Basis of property received by

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               Amount of Recognized
                  Gain or Loss
• To shareholder §331:
  – Gain or loss recognized on receipt of property
    from liquidating corporation
  – Amount = FMV of property received - basis in
    stock Shareholder is assumed to have sold the
    stock for the amount received.
  – Gain or loss is determined by comparing FMV
    of assets received, minus liabilities assumed,
    to the basis of the stock surrendered.

  Transparency 6-7
 Character of Gain or Loss
• Usually the stock is a capital asset,
  and the gain or loss is treated as a
  capital transaction.
• Sec. 1244 stock receives ordinary
  loss treatment.
• Losses sustained by a parent in a
  worthless stock investment in a
  controlled subsidiary receive
  ordinary loss treatment.
Transparency 6-8
      Basis of Property Received

• Under the general liquidation rules,
  the basis of property received is the
  FMV on the distribution date.
• The holding period starts on the day
  after the distribution date.

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      Effects of Liquidation on the
        Liquidating Corporation
 • Recognition of gains or losses
 • Liabilities assumed by shareholders
 • Exceptions to the general rules

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 Recognition of Gains or Losses

 • General rule:
   – Both gains and losses are
   – Tax attributes disappear

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           Consequences of Liquidation
                              (slide 2 of 2)

• To liquidating corporation §336:
  – Gain or loss is recognized by corporation on distribution
    or sale of property (loss may be disallowed or limited)
  – Amount = FMV of property distributed - basis in property
       • exception: If liability assumed, FMV treated as not less that
• Result:
  – Liquidating distribution subject to corporate
    level tax (gain), and shareholder level tax
    (receipt of proceeds)

   Transparency 6-12
              Liabilities Assumed or
 • The general rule is that distributed
   assets are valued at fair market
 • When a liability is assumed by the
   shareholder, the FMV of the related
   asset cannot be less than the amount
   of the liability assumed or acquired.

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  Exceptions to the General Rule

 • Related party rule:
   – No loss is recognized unless:
            • Prorated distribution of loss
            • Property was NOT acquired by
              capital contribution or under Sec.
              351 within the past five years
       – Gain is recognized

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  Exceptions to the General Rule

 • Tax-avoidance purpose:
       – If the primary purpose of the transfer
         of property and subsequent
         liquidation was to produce losses to
         offset gains from the liquidation of
         other property, the losses are

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                 Liquidation of a
               Controlled Subsidiary
 • Requirements
 • Effects of liquidating on the
 • Effects of liquidating on the
   subsidiary corporation

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     Requirements for Liquidation
     of a Subsidiary into a Parent
• Parent must own at least 80%of voting
  power and value of stock.
• There must be a complete cancellation or
  redemption of the subsidiary’s stock.
• Distribution must occur in a single tax
  year or qualify as one of a series of
  distributions that are completed within
  three years after the year of the first
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            Other Requirements
 • Subsidiary must be solvent
 • Does not apply to minority
 • Sec. 332(a) does not apply if parent
   receives a payment to satisfy the
   subsidiary’s indebtedness to the

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                       Effects on the
• Parent corporation recognizes no gain
  or loss when an 80% controlled
  subsidiary corporation is liquidated into
  the parent corporation [Sec. 332]
• If a controlled subsidiary is liquidated
  into the parent, the tax attributes carry
  over to the parent [Sec. 381(a)]

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             Types of Tax Attributes

 •   Potential for depreciation recapture
 •   NOL carryovers
 •   Earnings and profits balance
 •   Capital loss carryovers
 •   General business and other tax

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            Effects on the Liquidated
• Special rule for controlled subsidiary:
   – There is no gain or loss recognized when a
     controlled subsidiary transfers its assets
     and liabilities to a parent corporation. [Sec.
• The liquidating subsidiary recognizes no
  loss when it transfers assets to minority
  shareholders. [Sec. 336(d)(3)]
   – However, it does recognize gains.
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                    Effects of Minority
 • Liquidating distributions made to
   minority shareholders are taxed
   under Sec. 331 general liquidation
 • Minority shareholders recognize gain
   or loss (generally capital)

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                      §338 Election
                 Certain Stock Purchases
               Treated as Asset Acquisitions

 • Parent corporation can elect to treat
   the acquisition of stock in sub as a
   purchase of sub’s assets
       – parent has a basis in sub’s assets equal
         to its basis in sub’s stock
       – sub is treated as having sold all of its
         assets at FMV at close of acquisition
         date, then treated as a new corporation
         that purchased all the assets the next
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                        §338 Election
                   Certain Stock Purchases
                 Treated as Asset Acquisitions

• Allocation of purchase price by residual
  method according to FMV in order:
  – I - Cash, demand accounts, etc.
  – II - Marketable securities
  – III - Tangible and intangible (not I,II,IV)
  – IV - Sec. 197 intangibles other than goodwill
  – V - Goodwill
• No carry over holding period or attributes
  (NOL, credits, E&P, etc.)
  Transparency 6-24

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