Unformatted text preview: COMPREHENSIVE VOLUME--CHAPTER 20--CORPORATIONS: DISTRIBUTIONS IN COMPLETE LIQUIDATION AND AN OVERVIEW OF REORGANIZATIONS Student: ___________________________________________________________________________ 1. A corporation generally will recognize gain or loss on a liquidating distribution of installment notes to its shareholders. Section 332 can apply to a parent-subsidiary liquidation even if the subsidiary corporation is insolvent on the date of the liquidation. If a liquidation qualifies under § 332, any minority shareholder will recognize gain or loss equal to the difference between the fair market value of assets received and the basis of the shareholder’s stock. A subsidiary corporation is liquidated at a time when it is indebted to its parent corporation.Legal dissolution under state law is required for a liquidation to be complete for tax purposes. One similarity between the tax treatment accorded liquidating and nonliquidating distributions is with respect to a shareholder’s basis in property received in such distributions. The subsidiary corporation distributes property to the parent corporation in satisfaction of the indebtedness.A fine line exists between definitions of a corporate liquidation and dissolution.But for tax purposes, the defining line can make a big difference.In CCM 201237017, the Office of Chief Counsel was asked whether, in such situations, an S shareholder can increase stock basis upon the distribution of encumbered assets to the shareholder.
The anomaly is corporate dissolution without liquidation.
Divide distributions in partial liquidation among that part of the stock that is redeemed in the partial liquidation.
After the basis of a block of stock is reduced to zero, you must report the part of any later distribution for that block as a capital gain.
How you treat it depends upon whether this is a total payment or liquidation, or if it is part of an installment.
Basically, the distribution is not taxable up to the recovery of your basis in the stock.
Does Cash Liquidation Distribution in BOX 8 of 1099-DIV have to be reported?