Final regs. on consolidated group liquidations.

• Author: Schwartzman, Randy A.
• Position: CONSOLIDATED RETURNS

Final regulations effective January 15, 2008 (TD 9376), explain how the members of a consolidated group succeed to tax items, or "attributes" of a subsidiary corporation when two or more members of the group own stock in the subsidiary and the subsidiary is liquidated on a tax-free basis. This issue is present only in the consolidated return area because, in the absence of a consolidated group, only one "parent" corporation can succeed to the tax attributes of the liquidated subsidiary.

Rules Under the Code

Where the requirements of each provision are satisfied, Sec. 332 provides tax-free treatment to the corporate shareholder's gain or loss from the receipt of the subsidiary's property in liquidation, and Sec. 337 provides tax-free treatment to the subsidiary's gain or loss on the distribution of its property to the parent corporation. Sec. 332(b) provides for nonrecognition of gain or loss where the corporation receiving such property was, on the date of adoption of the plan of liquidation and at all times thereafter until the receipt of the property, the owner of stock meeting the requirements of Sec. 1504(a)(2) (generally 80% by voting power and value) and the distribution was made in complete cancellation or redemption of all the stock of the liquidating corporation.

Many of the consolidated return rules are premised on the goal of treating the various corporate members of the consolidated group as if they were divisions of a single corporation. To that end, Regs. Sec. 1.1502-34 permits shares of stock owned by two or more members of the group to be aggregated in order to determine whether the required stock ownership threshold has been satisfied. The rule specifically applies to the Sec. 332 stock ownership requirement, as well as other provisions of the Code not relevant to this discussion.

Sec. 337(a) generally provides that the liquidating corporation does not recognize gain or loss on the distribution to the 80% distributee of any property in a complete liquidation to which Sec. 332 applies. Sec. 337(c) provides that, for purposes of Sec. 337, the term "80% distributee" means only the corporation that meets the 80% stock ownership requirements of Sec. 332(b) without regard to the application of any consolidated return regulation, such as Regs. Sec. 1.1502-34. Thus, the subsidiary's gain or loss is eligible for nonrecognition only to the extent that property is distributed to a direct 80% corporate shareholder, even in a...