Page 265 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes the individual accountants, not the corporation. Under these circumstances, we conclude
that the value of any ‘customer-based intangibles’ that the corporation may have had was
nominal”.

Source: http://www.journalofaccountancy.com/Issues/2001/May/AvoidTaxesInLiquidation.htm
11.3 Liquidating a Corporation: How to Structure a Plan of
Liquidation to Avoid Unanticipated Tax Liabilities?

Before the Tax Reform Act of 1986 (TRA) was enacted, a corporation generally did not recognise
any gain or loss on the distribution of property in liquidation, or from corporate asset sales
conducted pursuant to a plan of liquidation. Corporate assets sales are now fully taxable, and
distributions in liquidation are treated as a deemed sale of property between the corporation and
its shareholders for Fair Market Value (FMV) on the date of distribution. This deemed sale can
present valuation problems if not an arm’s-length transaction. This article will discuss the issues
connected with the liquidation of a corporation, valuation of assets, limitations on losses for
certain liquidating distributions and other problem areas and offer planning opportunities and
techniques to minimise the overall tax consequences of liquidation.

Notes The Tax Reform Act of 1986 (100 Stat. 2085, 26 U.S.C.A. §§ 47, 1042) made major
changes in how income was taxed. The act altered or eliminated many deductions, changed
the tax rates, and eliminated several special calculations that had been permitted on the

basis of marriage or fluctuating income. Though the act was the most massive overhaul
of the tax system in decades, some of its key provisions were changed in the Revenue
Reconciliation Act of 1993.

11.3.1 Distribution of Assets

Sec. 336(a) provides, in general, that a liquidating corporation will recognise gain or loss on
the distribution of its property in a complete liquidation as if the property were sold to its
shareholders at FMV. If, however, any of the assets are subject to a liability, or if the shareholder
assumes a liability, FMV cannot be less than the liability. This corporate “exit tax” will reduce the
amount of assets available to distribute to the shareholders. While there is no limitation on the
recognition of gain from a liquidating distribution, statutory anti-abuse provisions may restrict
the recognition of losses. The distribution of assets in liquidation of the corporation will be treated
as full payment in exchange for the shareholder’s stock. The amount of gain or loss recognised by
the shareholder will be the difference between the FMW (net of liabilities) of the assets received
and the shareholder’s basis in his cancelled stock.

Did u know? Probable price at which a willing buyer will buy from a willing seller when

(1) both are unrelated,
(2) know the relevant facts,
(3) neither is under any compulsion to buy or sell, and
(4) all rights and benefit inherent in (or attributable to) the item must have been included

in the transfer.
FMV is generally the basis for tax assessment and court awards.

260 LOVELY PROFESSIONAL UNIVERSITY