Page 272 - DCOM508_CORPORATE_TAX_PLANNING

Unit 11: Tax Planning for Liquidation

3. Desire instalment sale treatment—capital gain income can potentially be reported on Notes
an instalment basis, while Sec. 301 dividend income cannot.
Handling Corporate Liabilities
Shareholders that assume corporate liabilities or receive property subject to corporate
liabilities take the liabilities into account in computing their gain or loss. They do not
increase their basis in the property received on liquidation because doing so would

give them a double tax benefit. Instead, the liability reduces the amount realised by the
shareholder.
If the property distributed is worth less than the amount of the liability itself, the FMV of the
property is treated as no less than the amount of the liability [Sec. 336(b)]. The assumption
of a contingent or unknown liability is disregarded in determining the property’s FMV.
However, the IRS has stated that a shareholder that assumes such a liability will receive
capital loss treatment when the liability is ultimately paid by the shareholder (Rev. Rul.
72-137).

Handling Unrealised Receivables
A corporation, whether it uses the cash or accrual basis, may have earned income that it has
not collected before the liquidation takes place. The corporation recognises gain or loss for
the receivable when it distributes the receivable to the shareholder. The shareholder does not
recognise and report additional income as it collects the receivable because the shareholder
has already included this amount in its gain or loss computation when it received the
liquidating distribution. But if the amount of the receivable that the shareholder ultimately
collects differs from the amount that the corporation distributed, the shareholder recognises
gain or loss for the differences in the amounts reported and collected.
Receiving Liquidating Distributions in More Than One Year

A distribution is treated as one made in complete liquidation of a corporation if it is one in
a series of distributions in redemption of all the stock of the corporation pursuant to a plan
of liquidation [Sec. 346(a)]. As a result, all the distributions necessary to effect a complete
liquidation of a corporation do not have to take place on the same date or even in the same
year.
Observation: Distributions in partial liquidation of a corporation must be made in the year
the plan is adopted or in the subsequent year. No such requirement exists for distributions
made in a complete liquidation of a corporation.
Unfortunately, no clear-cut guidance exists regarding the period over which liquidating
distributions can be made. In fact, Sec. 346 does not address this issue. The IRS indicates
it will normally not issue a ruling or determination letter on the tax effects of a corporate
liquidation accomplished through a series of distributions made over a period in excess of
three years from adoption of the plan of liquidation.
The liquidation should be completed as quickly as possible to ensure sale or exchange
treatment (as opposed to possible dividend treatment if the corporation has E&P) for the
liquidating distributions. Note also that Rev. Rul. 80-177 raises the issue of the constructive
receipt of assets by shareholders when a corporation adopts a plan of liquidation and
the shareholders are entitled to a liquidation distribution at any time after a certain date.
Finally, it may be desirable to avoid a lengthy liquidation period to minimise exposure to
double taxation and to avoid Sec. 541 Personal Holding Corporation (PHC) status for the
corporation after the assets are sold.
Shareholders should maintain documentation that multiple distributions are liquidating
distributions whenever multiple distributions are necessary (especially if they will span
Contd...

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