Tax consequences of a corporate liquidation

General corporation liquidation rules

1. the shareholder's recognized gain or loss equals the amount of cash plus the FMV of the other property recieved minus the adjusted basis of stock surrendered. corporate liabilities assumes or acquired by the shareholder reduce the amount realized
2. the gain or loss is capital if the stock investment is a capital asset. If the shareholder recognizes a loss on the liquidation, sec 1244 permits ordinary loss treatment (within limits) for qualifying individual shareholders
3. the adjusted basis of the property recieved is its FMV ont he distribution date
4. with certain limited exceptions, the distributing corporation recognizes gain or loss when making the distribution. The amount and character of the gain or loss are determined as if the corporation sold the property for its FMV immediately before the distribution. special rules apply when the shareholders assume or acquire corporate liabilities and the amount of such liabilities exceeds the property's FMV.
5. the liquidated corporation's tax attributes disappear upon liquidation. POOF!

Tax consequences of a corporate liquidation

tax consequences of liquidating a controlled subsidiary corporation

1. specific requirements must be met with respect to (a) stock ownership, (b) distribution of the property in complete cancellation or redemption of all the subsidiary's stock, and (c) the distribution of all property within a single tax year or within a three-year period. to satisfy the stock ownership requirement, the parent corporation must own at least 80% of the total voting power of all voting stock and at least 80% of the total value of all stock.
2. the parent corporation recognizes no gain or loss when it recieves distributed property from the liquidating subsidiary. section 332 does not apply to liquidations of insolvent subsidiaries and distributions to minority shareholders.
3. the basis of the distributed property carries over from the subsidiary corporation to the parent corporation
4. the parent corporation's holding period for the assets
5. the subsidiary corporation recognizes no gain or loss when making a distribution to an 80% distributee (parent). the liquidating subsidiary recognizes gain (but not loss) on distributions to minority shareholders. Also, the liquidating subsidiary recognizes no gain when it distributes appreciated property to satisfy certain subsidiary debts owed to the parent corporation
6. the subsidiary corporation's tax attributes carry over to the parent corporation as part of the liquidation

allowable tax year for a partnership

section 706 recquires that a partnership select the highest  ranked tax year-end from the ranking that follows

1. the tax year end used by the partners who own a majority interest in the partnership capital AND profits. (over 50%)
2. the tax year end used by all principal partners (i.e) partners who each owns an interest in at least 5% of the partnership capital or profits)
3. the tax year end determined by the least aggregate deferral test

if the partnership has a natural business year.

if not then can use fiscal year inder sec 444 but would have to make payment that approximates the tax due on the deferred income