Summary of tax rules for liquidating corporations.

• Author: Heroux, Mark

Domestic corporations, either S corporations or C corporations, are liquidated by applying Secs. 331-346. This discussion provides a review of the rules that apply to liquidating corporations, but it does not address the exceptions set forth in Sec. 361 via a reorganization plan or the exceptions arising from having foreign liquidating corporations or foreign shareholders.

General liquidations

When a domestic corporation either partially or completely liquidates through a one-time event or through a series of distributions in redemption of part or all of the stock of the corporation pursuant to a plan, the cash and the fair market value (FMV) of the property received by a shareholder is generally treated as proceeds in exchange for the stock unless the shareholder is a qualifying corporation. If a complete distribution happens within one tax year starting with the date of the first distribution, the distribution will generally default to a liquidating distribution (Sec. 332(b)(2)). The liquidating corporation may also adopt a liquidation plan that would generally be made through either a single distribution or a series of distributions made over no greater than a three-year period starting with the first distribution (Sec. 332(b)(3)).

Generally, the shareholder's basis in the property received equals its FMV at the time of distribution (Sec. 334). The shareholder will use the carrying period on its shares in order to determine whether the gain is long-term or short-term capital gain. The received assets will then start their carrying period anew as of the date of the liquidating distribution. The liquidating corporation is generally required to recognize gain or loss on the assets disposed of (Sec. 336). This amount is calculated as if the property were sold to the shareholder at the FMV of the assets.

Multiple distributions

If a liquidating plan includes multiple distributions over multiple years, the receiving shareholder will not recognize a gain until the FMV of the received property exceeds the aggregate shareholder's basis in the stock (even if the shareholder surrenders a portion of its stock immediately). If the receiving shareholder is expecting to recognize a loss, the shareholder will not be able to recognize the loss until the last distribution is made.

Corporations liquidating to 80%-or-more corporate shareholder

When property is distributed in a complete liquidation of a corporation to another corporation with ownership...