Chapter 16 – Corporate Liquidations

I. General Rules for Complete Liquidations

• Liquidating corporation recognizes gain and loss as if it sold its assets at

a market value price.

a. Exception where loss is not recognized on assets distributed to a

related shareholder if either:
1. non-pro-rata distribution of assets, or
2. property was contributed via section 351
within the last 5 years

• Shareholder(s) recognize gain or loss as if they sold stock for amount

received in liquidating distribution.

• Shareholder(s) receive fair market value basis in assets received

 Chapter 16 – Corporate Liquidations

Problem 28
Taxpayer receives a liquidating distribution from
Corporation when her basis in stock is $13,000.
Taxpayer received $15,000 cash and property in which
the corporation had a $10,000 basis, which had a
market value of $35,000. The property was subject to
a $18,000 mortgage. Explain the tax consequences.
 Chapter 16 – Corporate Liquidations

Problem 28 Answer
• Corporation recognizes gain of $25,000
($35k FMV - $10k adjusted basis)

• Taxpayer recognizes gain of $19,000

(Amount realized of $32,000 ( $35k property
+$15k cash - $18k liability)less adjusted
basis in stock of $13,000.)
 Chapter 16 – Corporate Liquidations
II. Parent – Subsidiary Liquidations
• Requirement for Parent – Subsidiary Liquidations
• Parent corporation owns at least 80% of Subsidiary corporation.

• Treatment of Parent
• No Gain or Loss
• Carryover basis (i.e., parent receives same basis that sub had in property
received.)

• Treatment of Subsidiary
• No gain or loss on property distributed to parent.
• Gain, but not loss on property distributed to minority shareholders

• Treatment of Minority Shareholders

• Minority shareholders recognize gain or loss as if they sold stock for amount
received in liquidating distribution.
• Shareholder(s) receive fair market value basis in assets received
 Chapter 16 – Corporate Liquidations

Problem 27
Baretta Corrp owns 100% of PPK Corp stock.
Pursuant to a plan of liquidation PPK
distuibutes property with a basis of 220,000
and market value of $200,000. What are the
tax consequences to both parties?
 Chapter 16 – Corporate Liquidations

Problem 27- Answer

No gain or loss is recognized by either party since

this is a parent/subsidiary liquidation due to one
corporation owning at least 80% of the other’s
stock. Accordingly, Baretta Corp. will take a
transferred basis in the property of $220,000.