Page 268 - DCOM508_CORPORATE_TAX_PLANNING

Unit 11: Tax Planning for Liquidation

Provided a legitimate business purpose exists for delaying the liquidating distributions, Notes
shareholder gain may be deferred by permitting the shareholder to first fully recover

his basis. Losses cannot be recognised until all distributions are completed. Legitimate
business purposes may include the retention of assets to satisfy liabilities, continued
efforts to sell assets and the completion of all steps necessary to wind up the corporation’s
affairs. If there is no legitimate business purpose for delaying corporate distributions,
the shareholder will be in constructive receipt of all funds, with all gain recognised
immediately. A corporation discharged all of its liabilities and liquidated all of its assets.

The company notified its shareholders that they would be able to receive a liquidating
distribution on surrender of their shares of stock after a given date. Although a cash-basis
shareholder postponed surrendering his shares until the following year, all income was

recognised in the year in which the corporation notified the shareholder that a distribution
was available. Postponement of gains recognition may be available when a distributed
asset has no ascertainable value.

Example: A taxpayer sold shares of stock in exchange for cash and a contract to receive
60 cents per ton of iron ore to be mined in the future. The taxpayer received payments under
the contract, but did not include them in income because she felt that the contingent nature of
the payments should permit the use of basis recovery. The Supreme Court ruled that the mere
promise of future monetary payments contingent on non ascertainable factors is not equivalent
to the receipt of cash. Therefore, as annual payments based on the amount of extracted ore
were received, they were apportioned first as return of capital and later as profit. The IRS has

taken the view that only in “rare and extraordinary cases” will the valuation of an asset be non
ascertainable.
(iii) Income shifting through a pre-liquidation gift of shares: If a shareholder has charitable
desires or is interested in transferring wealth to a family member, a corporate liquidation
presents a tax planning opportunity. A taxpayer may be reluctant to transfer shares in a
closely held corporation because the transfer may result in a loss of control or a shift of
ownership outside a family group. However, if a complete liquidation is contemplated,
a transfer of shares can create tax savings without adverse ownership changes. As a
general rule, income can be assigned provided the property that produces the income is
transferred.
A gift of shares to a family member can shift the income from a liquidating distribution to

the done. Similarly, a donation of shares to a qualified charitable organisation can produce
an immediate charitable contribution deduction while also shifting income to the exempt
entity. The contribution deduction will be the FMV of the donated shares, unless the
taxpayer is subject to the alternative minimum tax for the year of the transfer. Also, if a gift
of non-publicly traded stock is made to a private foundation, the regular tax deduction is
limited to adjusted basis.

Self Assessment

State whether the following statements are true or false:
9. Corporate assets sales are not fully taxable.
10. Due to limitation on the recognition of gain from a liquidating distribution, statutory anti-
abuse provisions may restrict the recognition of losses.
11. Losses may also the limited for certain distributions or sale or exchange transactions with
a tax-avoidance motive.
12. If the liquidated corporation meets the definition of a collapsible corporation, any

shareholder loss will be considered ordinary income.

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