SECTION F-027B7 - SPECIAL CORPORATE TRANSACTIONS. Table Of Contents. Table Of Contents

Transcription

1 SECTION F-027B7 - SPECIAL CORPORATE TRANSACTIONS Table Of Contents Table Of Contents Introduction Similarities and dissimilarities of corporate transactions Types of corporations involved in these materials Two definitions The income tax effect to noncorporate recipients of corporate distributions A transfer of assets (by corporations and noncorporations) to a corporation in return for stock of the transferee corporation The theory of IRC section Transfers of corporate attributes Carryover of corporate attributes from one corporation to another Distributions by a corporation of its stock to its shareholders Distributions by a corporation of its assets to its shareholders Nonliquidating corporate distributions Partially liquidating corporate distributions Completely liquidating corporate distributions The statutory corporate dissolution provisions of the State of Indiana Certain nonreorganization distributions by a corporation of its assets to its shareholders To repeat some very important observations about the above comments What are the purposes of the IRC reorganization sections? The types of reorganizations which are described in IRC section An A reorganization is a statutory merger or consolidation A general description of an A reorganization The statutory corporate merger provisions of the State of Indiana Four general requirements to have an A reorganization Four very important requirements for an IRC section 368(a)(1)(A) Reorganization plans A party to the reorganization A continuity of business purposes or business enterprise Summary of IRC sections application to IRC section 368(a)(1)(A) reorganizations Some reorganization documents A letter to the IRS requesting a private letter ruling (a PLR) for a corporation division A notice to shareholders of the effect of a merger Some questions Distributions by a corporation of its stock to its shareholders Copyright 1986 Through 2006, Professor Jegen s Taxsite F-027B7-SpecialCorporateTransactions -1-

2 Distributions by a corporation of its property to its shareholders Some important IRC sections concerning: corporate organizations; corporate distributions; and, corporate reorganizations Corporate organizations Corporate distributions Corporate reorganizations The players and the transactions The questions Transaction Series One Transaction Series Two Transactions Series Three Transaction Series Four Transaction Series Five Transaction Series Six Transaction Series Seven Copyright 1986 Through 2006, Professor Jegen s Taxsite F-027B7-SpecialCorporateTransactions -2-

3 I. Introduction. These course materials discuss various types of important corporate tax transactions in order to compare and contrast the transactions, and thereby, cause the reader to understand to the purpose of each type of transaction and to attempt to ascertain the theory of when important corporate transactions are taxable to the corporation and/or to the shareholders. A. Similarities and dissimilarities of corporate transactions. When reading these course materials, it is important to notice certain similarities and dissimilarities of the transactions which cause the corporation or the shareholders of the corporation to be or not to be income taxed with respect to certain aspects of the transaction. 1. For example, notice the difference in the result of certain transactions when, e.g.: a. The shareholders are in control of the corporation by owning 80% or more of the corporation s stock. See IRC section 368(c); b. And/or, when a corporation transfers all or substantially all of the corporation s assets to another corporation; c. And/or, when a corporation exchanges some of its stock for stock in another corporation. B. Types of corporations involved in these materials. The comments in these course materials are directed primarily to C corporations, which involve double income taxation (at both the corporate level and at the shareholder level), and the comments are not generally directed to S corporations, which involve single taxation (at the shareholder level only). C. Two definitions. Through out these course materials, an asset which has appreciated in value over the asset s adjusted basis is referred to, at times, as a gain asset and an asset which has declined in value under the asset s adjusted basis is referred to, at times, as a loss asset. D. The income tax effect to noncorporate recipients of corporate distributions. In general, if an individual receives a corporate distribution, with respect to their stock, then IRC section 301 provides that the individual must treat the distribution as follows. 1. First, the distribution is treated as a dividend to the shareholders to the extent of the lower of the amount of the distribution and the amount of the distributing corporation s earnings and profits. a. This amount is treated as recognized ordinary income (without any reduction by the shareholder s adjusted basis for the shareholder s stock) and this amount will have a maximum income rate of 5% or 15% applied to such dividend. 2. To the extent that the distribution exceeds the amount of the dividend, if any, the shareholder may offset the adjusted basis of the shareholder s stock in the corporation against the fair market value of the distribution, and 3. If the amount of the distribution exceeds the shareholder s adjusted basis for the shareholder s shares in the corporation, then the shareholder will be income taxed on such excess. a. Generally, such excess will be treated as long term capital rate and will be eligible for the maximum income tax rates of 5% and 15%. 4. If the total of the nondividend distribution does not exceed the shareholder s adjusted basis Copyright 1986 Through 2006, Professor Jegen s Taxsite F-027B7-SpecialCorporateTransactions -3-

4 for the shareholder s stock and the distribution is made in complete liquidation of the corporation, then the recipient shareholder may have a deductible capital loss, probably, a long term capital loss. 5. Also, keep in mind that if any of the corporate distributions herein involve the corporation recognizing gain from a distribution of a gain asset to a shareholder and if the corporation is an S corporation, then any recognized gain to the S corporation will be includable in the gross incomes of the shareholders of the S corporation and not income taxed to the S corporation, and, the gain will cause the shareholders adjusted bases of the shareholders stock in the S corporation to increase. II. A transfer of assets (by corporations and noncorporations) to a corporation in return for stock of the transferee corporation. This is a fairly common transaction. If the transaction is carried out properly, then there will be no gain or loss recognized to either the corporation or to the transferees of property to the corporation (who then become shareholders of the corporation). A. In general, what happens if a corporation distributes its stock to persons who are then (or thereby become) shareholders of the corporation, for property of such persons, and immediately thereafter, the transferors of the property are in control (80% or more) of the corporation? B. The theory of IRC section 351. The theory of IRC section 351 is that a person should be able to change one form of doing business for another form of doing business without having to pay income tax to do that. You might think that the IRC would require a person to go from a 100% owner (e.g., of a sole proprietorship) to a 100% owner of a corporation, but IRC section 351 only requires the transferors to own 80% of the stock in the corporation. 1. However, even though the IRC requires ownership of only 80%, this percentage is very important in corporate organizations, corporate reorganizations, and other corporate transactions. a. At times, this important percentage drops to 50% in other types of corporate transactions. C. The corporation does not recognize any gain or loss from the transaction due to IRC section D. The shareholders do not recognize any gain or loss with respect to the receipt of the corporate stock for the property transferred to the corporation. See IRC section If the transferors do not control the corporation immediately thereafter, then the transferors can recognize gain or loss. However, the corporation still will not recognize any loss. 2. If the transferors do not transfer property, then the transferors can recognize gain, but not loss, e.g., if the transfers only receive stock for services, then that person is not a transferor and may not be counted in determining who is in control of the corporation. 3. If the transferors receive, from the corporation, only (or in addition to) the stock, things like cash or other property or promissory notes of the corporation, then these things are referred to as boot for the purposes of IRC section 351(a). a. Any thing received by the transferors which is not stock is boot and the transferors can have gain recognized due to the receipt of boot, but the transferors will not recognize any loss. 4. The corporation s adjusted basis for the property received by corporation is the same Copyright 1986 Through 2006, Professor Jegen s Taxsite F-027B7-SpecialCorporateTransactions -4-

5 adjusted basis (or adjusted bases) which the transferors had for the property transferred by the transferors to the corporation. See IRC section The corporation s holding period for the property may include the holding period of the property by the transferors. See IRC section The shareholder-transferor s adjusted basis for the shareholder s stock received from the corporation is the same as the total of the adjusted bases which the shareholder-transferor had for the property which the shareholder-transferor transferred to the corporation. See IRC section The shareholder-transferor s holding period of the shareholder-transferor s stock can include the holding periods which the shareholder-transferee had for the property which the shareholder-transferor transferred to the corporation. See IRC section If the corporation assumes obligations of the transferors, then, with two exceptions, no gain is recognized to the transferors due to that assumption. See IRC section 357. E. So what happens if a corporation transfers gain assets or loss assets (including stock of another corporation) to another corporation and the transferor corporation receives back stock of the other corporation as part of a corporate reorganization? In general, we do not need any other IRC sections to tell us more than IRC section 351, IRC section 1032, IRC section 358, IRC section 362, and IRC section 1223 tell us. 1. An example of this could be involved with, e.g., an IRC section 351 transaction. If the transferor (of assets) corporation controls the other corporation immediately after the controlling corporation receives stock in the other corporation (the corporate to which assets were transferred by the controlling corporation), then no gain or loss is recognized to the transferor of property corporation and no gain or loss is recognized to the recipient of property corporation. See IRC section 351 and See IRC section For basis, see IRC section 358 and see IRC section 362. For holding periods, see If the transferor corporation does not control the other corporation immediately thereafter, then gain or loss can be recognized by the transferor corporation through the normal sale or exchange rules, but the transferee corporation would still be sheltered by See IRC section See IRC section 61 and See IRC section Just as in an IRC section 351 organization of a corporation, generally, if there is no gain or loss recognized to a corporation which transfers property to another corporation, then the bases of assets to the recipient corporation will be the same as the adjusted bases of the assets to the transferring corporation. 4. On the other hand, if the transferring corporation does recognize gain or loss upon the transfer of property to another corporation, then, generally, the recipient corporation will have a new fair market value basis for the assets. III. Transfers of corporate attributes. If one corporation organizes another corporation and the first corporation transfers assets to the second corporation in return for stock in the second corporation, and immediately thereafter, the first corporation controls (80% or more) of the second corporation, will corporate attributes carryover from the first corporation to the second corporation? A. Carryover of corporate attributes from one corporation to another. In general, IRC section 381 states that in the case of the acquisition of assets of a corporation by another corporation Copyright 1986 Through 2006, Professor Jegen s Taxsite F-027B7-SpecialCorporateTransactions -5-

6 1. in a distribution to such other corporation to which IRC section 332 applies; or 2. in a transfer to which IRC section 361 applies, but only if the transfer is in connection with a reorganization described in subparagraph (A), (C), (D), (F), or (G) of IRC section 368(a)(1), a. the acquiring corporation shall succeed to and take into account, as of the close of the day of distribution or transfer, the items described in subsection (c) of the distributor or transferor corporation, subject to the conditions and limitations specified in subsections (b) and (c). For purposes of the preceding sentence, a reorganization shall be treated as meeting the requirements of subparagraph (D) or (G) of section 368(a)(1) only if the requirements of subparagraphs (A) and (B) of section 354(b)(1) are met. 3. Therefore, corporate attributes will not carryover from one corporation to another upon an IRC section 351 transaction unless that transaction is part of a corporate reorganization which is described in IRC section 368(a)(1)(A), (C), (D), (F), or (G). B. For additional comments about IRC section 351, see the U.S. Treas. Regulations below and see F- 027B2 at Professor Jegen s taxsite. IV. Distributions by a corporation of its stock to its shareholders. In general, what happens if a corporation distributes its stock to its shareholders? A. For example, what is the result to the corporation and to the shareholders if the corporation declares a 100% stock common stock dividend for shareholders who own common stock in the corporation? 1. Consider IRC section 1032 and IRC section 305. a. The distributing corporation does not recognize any gain or loss. See IRC section b. In general, the recipient shareholders do not recognize any gain. See IRC section 305(a). (1) That is, any gain which the shareholder realizes is not recognized at that time. The recognition by the shareholder of such gain is postponed. (2) Each recipient shareholder must allocate the shareholder s basis for the shareholder s old stock between the shareholder s old stock and the shareholder s new stock. See IRC section 307. (3) The recipient shareholder s holding period for the shareholder s old shares will carryover to the shareholder s new shares. See IRC section c. However, there are several types of distributions of stock by a corporation which will cause the recipient shareholder to include fair market value of the distributed stock in the recipient shareholder s gross income. See IRC section 305(b). (1) For example, the following types of distributions of a corporation s stock to the corporation s shareholders will cause the distributed stock to be gross income to the shareholders. (a) Shareholders have the choice of receiving stock or cash from the distributing corporation. Copyright 1986 Through 2006, Professor Jegen s Taxsite F-027B7-SpecialCorporateTransactions -6-

7 i) In such a case, the shareholders will recognize ordinary income upon the receipt of either the cash or the stock. That is, both the cash and stock will be considered to be a property dividend and not a stock dividend to the recipient shareholders. (b) The result of the distribution is that some shareholders receive property of the corporation and that other shareholders receive stock of the corporation. i) In such a case, the shareholders will recognize ordinary income upon the receipt of either the property or the stock. That is, both the property and stock will be considered to be a property dividend and not stock dividend to the recipient shareholders. (c) The distribution is of common stock to some of the common shareholders and a distribution of preferred stock to other common shareholders. i) In such a case, the shareholders will recognize ordinary income upon the receipt of either the common stock or the preferred stock. That is, both the common stock and the preferred stock will be considered to be a property dividend and not stock dividend to the recipient shareholders. (2) Also, in these cases, the recipient shareholder s holding period for the new stock begins on the date when the recipient shareholder s stock is issued to the recipient shareholder. B. What is the result to the corporation and to the shareholders if the corporation has the shareholders turn in all of the shareholders stock to the corporation and, in return, the corporation distributes, under a plan which is approved by the board of directors and by the shareholders, Class A Common Stock to some of the shareholders and Class B Common stock to the other shareholders? The two class of the stock are the same, except that the holders of the Class A stock have the right and power to vote for two individuals as members of the board of directors and the holders of the Class B stock have the right to vote for three individuals as member of the board of directors. 1. Consider IRC section 1032 and IRC section a. The distributing corporation does not recognize any gain or loss. See IRC section b. In general, the recipient shareholders do not recognize any gain. See IRC section (1) That is, any gain which the shareholder realizes is not recognized at that time. The recognition by the shareholder of such gain is postponed. (2) Each recipient shareholder must allocate the shareholder s basis for the shareholder s old stock between the shareholder s old stock and the shareholder s new stock. See IRC section 307. Copyright 1986 Through 2006, Professor Jegen s Taxsite F-027B7-SpecialCorporateTransactions -7-

8 (3) The recipient shareholder s holding period for the shareholder s old shares will carryover to the shareholder s new shares. See IRC section V. Distributions by a corporation of its assets to its shareholders. In general, what happens if a corporation distributes either gain assets or loss assets (including stock of another corporation) to the corporation s shareholders? A. The results of a nonliquidating distribution which is treated as a dividend to the shareholder is as follows. 1. If the distributing corporation distributes a gain asset to a shareholder, then the gain will be recognized to the distributing corporation. However, the distribution of a loss asset by the corporation to its shareholders will not be recognized by the corporation. See IRC section 311(a)-(b). 2. The distribution to the shareholder will be treated under IRC section 301(c), unless the distributions qualifies under: a. IRC section 302(a) concerning certain nonliquidating corporate distributions in redemption of the corporation s stock (specifically, distributions involved in stock redemptions which qualify under IRC section 302(b)(1)-(3); or, b. IRC section 303(a) concerning certain nonliquidating corporate distributions in redemptions of the corporation s stock upon the death of a shareholder; or, c. IRC section 302(a) concerning certain partially liquidating corporate distributions in redemption of the corporation s stock (specifically, distributions involved in stock redemptions which qualify under IRC section 302(b)(4); or, d. IRC section 331(a) concerning certain complete liquidations or complete liquidations under IRC section 332; or, e. One or more of the various corporate reorganizations sections. 3. If the distribution is not excluded by IRC section 301, then IRC section 301(c) provides as follows. a. First, the distribution is treated as a dividend which is included in the shareholder s gross income to the extent of the amount of the corporation s earnings and profits. See IRC section 301(c)(1) and IRC section 316. (1) This amount will have a maximum income tax rate apply to it of 15% (2) A noncorporate recipient shareholder must include the fair market value of the distribution in the shareholder s gross income to the extent of the lower of the corporation s earnings and profits and the fair market value of the distribution to the shareholder. See IRC section 301(c)(1) and IRC section 316. b. Second, in the case in which some amount of the distribution exceeds the amount of the corporation s earnings and profits, such excess amount is treated as a return of the shareholder s adjusted basis for the shareholder s stock. (1) This amount will not be income taxed to the shareholder, but this amount Copyright 1986 Through 2006, Professor Jegen s Taxsite F-027B7-SpecialCorporateTransactions -8-

9 will reduce the shareholder s adjusted basis for the shareholder s stock. See IRC section 301(c)(2). c. Third, a distribution which is in excess of the shareholder s adjusted basis of the shareholder s stock and which is treated as gain from the sale or exchange of the shareholder s stock which will generally be long term capital gain because the shareholder will generally have held the stock as a capital asset for more than one year. See IRC section 301(c)(3). (1) This amount will have a maximum income tax rate apply to it of 15% d. The recipient shareholder s basis for the property is the fair market value of the property on the date on which the distributing corporation transfers the property to the recipient shareholder. e. And, the recipient shareholder s holding period for the property received begins on the date when the distributing corporation transfers the property to the recipient shareholder. 4. A corporate recipient shareholder must include the dividend (the fair market value of the property distributed up to the amount of the recipient corporation s earnings and profits) in the recipient-corporation-shareholder s gross income, but the recipient-corporationshareholder is entitled to deduct 70% of the dividend which is received by the recipient corporation. a. To be more specific, any dividend income which a corporate shareholder receives allows the corporation to deduct 70% of the amount of the dividend received, and then, to income tax the remaining 30% of the amount of the dividend received at the income tax rates which are imposed on the corporation s other taxable income. b. The recipient shareholder s basis for the property is the fair market value of the property on the date on which the distributing corporation transfers the property to the recipient shareholder. c. And, the recipient shareholder s holding period for the property received begins on the date when the distributing corporation transfers the property to the recipient shareholder. B. Nonliquidating corporate distributions. As previously stated, the results of a nonliquidating distribution which is not treated as a dividend to the shareholder, e.g., a distribution which is accompanied by a redemption of stock and which is treated under IRC section 302 or IRC section 303, is as follows. 1. By definition, the distribution is not a dividend, even if the distributing corporation has earnings and profits far in excess of the distribution. 2. Therefore, if the distributing corporation distributes a gain asset to a shareholder which distribution is a not dividend to the recipient shareholder, because the distribution qualifies under IRC section 302 or IRC section 303, then gain will be recognized to the distributing corporation. However, if the corporation distributes a loss asset, then the loss is not recognized to the distributing corporation. See IRC section 311(a)-(b). 3. A noncorporate recipient shareholder must offset the fair market value of the distribution against the shareholder s adjusted basis of the shareholder s stock (which is properly Copyright 1986 Through 2006, Professor Jegen s Taxsite F-027B7-SpecialCorporateTransactions -9-

10 redeemed under IRC section 302 or IRC section 303) and this results in no gain or loss to the shareholder, and then, any excess amount of the distribution (over the shareholder s stock adjusted basis) is includable in the shareholder s gross income as income from the sale or change of the shareholder s stock. See IRC section 302(b)(1)-(3) and IRC section 303(a). a. IRC section 302(b)(1) provides for a distribution and a redemption of the shareholder s stock which is not essentially equivalent to a dividend. The rules of attribution of IRC section 318 apply. b. IRC section 302(b)(2) provides for a distribution and a redemption of the shareholder s stock which lowers a shareholder s prior ownership interest so that, after the redemption, the shareholder owns less than 50% of the corporation s outstanding stock, and in addition, the shareholder owns less than 80% of the percentage of stock which the shareholder owned prior to the redemption. The rules of attribution of IRC section 318 apply. c. IRC section 302(b)(3) provides for a distribution and a redemption of the shareholder s stock which terminates the shareholder s ownership interest in the corporation. The rules of attribution of IRC section 318 apply. d. IRC section 303 provides for a distribution and redemption of the shareholder s stock which is limited to the amount of an estate s death taxes, interest thereon, funeral expenses, and administration expense. 4. The recipient shareholder s basis for the property is the fair market value of the property on the date on which the distributing corporation transfers the property to the shareholder. 5. And, the recipient shareholder s holding period for the property received begins on the date when the distributing corporation transfers the property to the recipient shareholder. C. Partially liquidating corporate distributions. The results of a partial liquidating distribution which is not treated as a dividend to the shareholder, i.e., a distribution which is accompanied by a redemption of stock and which is treated under IRC section 302(b)(4) as a partial liquidation, is as follows. 1. By definition, the distribution is not a dividend, even if the distributing corporation has earnings and profits far in excess of the distribution. 2. If the distributing corporation distributes a gain asset to a shareholder which is a not dividend to the recipient shareholder, because the distribution qualifies under IRC section 302(b)(4), then gain will be recognized to the distributing corporation. However, a distribution of a loss asset is not recognized to the distributing corporation. See IRC section 311(a)-(b). 3. A noncorporate recipient shareholder must offset the fair market value of the distribution against the shareholder s adjusted basis of the shareholder s stock (which is properly redeemed under IRC section 302(b)(4), to this extent, there would be no gain or loss to the shareholder, and then, any excess amount of the distribution over the shareholder s stock adjusted basis) is includable in the shareholder s gross income as income from the sale or change of the shareholder s stock. See IRC section 302(b)(4). a. IRC section 302(b)(4) provides that property which is received by a noncorporate shareholder, from a corporation, in exchange for the shareholder's stock as part of a partial liquidation, is to be treated as a distribution in exchange for the stock. Copyright 1986 Through 2006, Professor Jegen s Taxsite F-027B7-SpecialCorporateTransactions -10-

11 b. A shareholder who is not a corporation may recognize capital gain or capital loss as a result of the distribution and the shareholder may offset some or all of the adjusted basis of the shareholder's stock which are assumed to be redeemed as part of the partial liquidation. 4. IRC section 302(e)(1) states that a corporate distribution is to be treated as being made as part of a "partial liquidation" if: a. The distribution is not essentially equivalent to a dividend (determined at the corporate level rather than at the shareholder level); and, b. The distribution is pursuant to a plan of the corporation and the distribution occurs within the taxable year in which the plan is adopted or within the succeeding taxable year. 5. Partial liquidations are meant to include cases involving the genuine contraction of a corporation. a. For example, a distribution which terminates one of two or more active businesses engaged in by the distributing corporation is an example of a corporate contraction. b. Also, IRC section 302(e)(2) provides as follows. (1) The distribution must be attributable to the corporation's ceasing to conduct, or consist of the assets of, a "qualified" trade or business. (2) Immediately after the distribution, the corporation must be actively engaged in a "qualified" trade or business. (3) A qualified trade or business, both the one retained and the one which was distributed, must have been actively conducted (although not necessarily by the distributing corporation) during the five years immediately prior to the distribution. (4) Neither trade or business was acquired by the distributing corporation during such prior five years in a transaction in which gain or loss was recognized partially or totally. 6. The recipient shareholder s basis for the property is the fair market value of the property on the date on which the distributing corporation transfers the property to the shareholder. 7. And, the recipient shareholder s holding period for the property received begins on the date when the distributing corporation transfers the property to the recipient shareholder. D. Completely liquidating corporate distributions. The results of a complete liquidation distribution which is not treated as a dividend to the shareholder, i.e., a distribution which is accompanied by a redemption of stock and which is treated under IRC section 331as a complete liquidation, is as follows. 1. By definition, the distribution is not a dividend, even if the distributing corporation has earnings and profits far in excess of the distribution. 2. If the distributing corporation distributes either a gain asset or a loss asset to a shareholder, which distribution is not dividend to the recipient shareholder because the distribution Copyright 1986 Through 2006, Professor Jegen s Taxsite F-027B7-SpecialCorporateTransactions -11-

12 qualifies under IRC section 331, then both gain and loss can be recognized to the distributing corporation. See IRC section 336(a). 3. A noncorporate recipient shareholder (in a liquidation) must offset the fair market value of the distribution against the shareholder s adjusted basis of the shareholder s stock which is properly redeemed under IRC section 331 and this results in no gain or loss to the shareholder, and then, any excess amount of the distribution (over the shareholder s stock adjusted basis) is includable in the shareholder s gross income as income from the sale or change of the shareholder s stock. See IRC section The recipient shareholder s basis for the property is the fair market value of the property on the date on which the distributing corporation transfers the property to the shareholder. See IRC section 334(a). 5. And, the recipient shareholder s holding period for the property received begins on the date when the distributing corporation transfers the property to the recipient shareholder. 6. If one corporation owns stock in another corporation and the second corporation liquidates, and thereby, transfers some of the liquidating corporation s assets to the shareholder corporation in return for the stock which the shareholder corporation owns in the liquidating corporation, will corporate attributes carryover from the liquidating corporation to the shareholder corporation? a. If your answer is yes, then state your statutory authorities for your answer. b. If your answer is no, then state your statutory authorities for your answer. 7. What are the results to a liquidating corporation and to the shareholders thereof if the corporation is completely liquidated in an IRC section 332 transaction? a. In general, IRC 311(a) states that no gain or loss is recognized to a corporation when the corporation distributes property with respect to the corporation s shareholders in transactions other than corporate liquidations. Then, IRC 311(b) essentially states that gain will be recognized to the distributing corporation in all of the above property distribution transactions, including corporate liquidations and IRC section 336(a) makes it clear that, in general, a liquidating corporation will recognize gain or loss upon the liquidation. (1) However, see IRC section 336(d)(3). b. However, if the transaction is an IRC section 332 complete liquidation, then IRC section 337, in general, states that no gain or loss will be recognized to the liquidating corporation (the subsidiary corporation). An IRC section 332 liquidation is the complete liquidation of a subsidiary corporation which is controlled (80% or more by the parent corporation). Therefore, based on IRC section 337 (i.e., no gain or loss is recognized to the subsidiary corporation when the subsidiary corporation liquidates and distributes its assets to the parent corporation in an IRC section 322 liquidation), IRC section 334(b) states that the parent-recipient-corporation will have the same adjusted basis for the subsidiary-distributing-corporation s assets as the subsidiary-distributing-corporation has for such assets at the time of the subsidiarydistributing-corporation s liquidation. (1) To restate: IRC section 334(b) states if there is an IRC section 332 complete liquidation, then the adjusted basis of the liquidating corporation s Copyright 1986 Through 2006, Professor Jegen s Taxsite F-027B7-SpecialCorporateTransactions -12-

13 property which is transferred by the liquidating corporation to the surviving corporation (the parent corporation; the controlling corporation; the recipient corporation; the transferee corporation) is the same as the adjusted basis which the liquidating corporation (the subsidiary corporation; the controlled corporation; the distributing corporation; the transferor corporation) had for the property if there is an IRC section 332 liquidation. 8. With respect to the distributions which the liquidating corporation makes to the minority shareholders of the liquidating corporation as part of an IRC section 332 liquidation, the U.S. Treas. Regulations at state that upon the liquidation of a corporation in pursuance of a plan of complete liquidation, the gain or loss of minority shareholders shall be determined without regard to IRC section 332, because IRC section 332 does not apply to the distributions in liquidation received by minority shareholders. 9. On the other hand, IRC section 338 states that if a corporation acquires control (80% or more) of the stock of another corporation, then, in certain circumstances as part of an IRC section 332 liquidation, the acquiring corporation may elect to have the assets of the acquired corporation (the subsidiary corporation) grossed up, e.g., by using the value of the stock which the acquiring corporation acquired primarily during a 12-month period of time. a. You can read IRC section 338 about how the acquired stock is divided up and how the stock is used to gross up the value of the assets of the subsidiary corporation. However, once the gross up is made, there then is a presumption that the subsidiary corporation has sold the assets for the grossed up amount, and therefore, the subsidiary corporation will recognize gain or loss, and, if the result is taxable income to the subsidiary corporation, then the subsidiary corporation will have to pay income tax due to such assumed or presumed sale. However, this might bring about an important result to the parent corporation, specifically, the parent corporation can then acquire the assets of the subsidiary corporation, as part of the liquidation process of the subsidiary corporation, with a higher basis (a fair market value basis) than the assets have in fact to the subsidiary corporation, i.e., a higher basis for the assets than the carryover basis which the parent corporation would have received had the election, by the parent corporation, not been made to cause the subsidiary corporation to be treated as though the subsidiary corporation had sold the subsidiary corporation s assets. b. Why would the parent corporation make the IRC section 338 election? Because the parent corporation paid a high amount for the subsidiary corporation s stock and the assets of the subsidiary corporation have a low basis which the parent corporation would receive if neither corporation recognizes gain or loss upon the liquidation. The adjusted basis of the subsidiary corporation s assets would pass with the assets from the subsidiary corporation to the parent corporation upon the liquidation of the subsidiary corporation. (1) So if parent corporation makes the IRC section 338 election, then this becomes a situation in which one corporation has gain or loss recognized in the liquidation transaction, so the parent corporation will receive the subsidiary corporation s assets with a stepped up (and not a carryover basis). See IRC section 334(b). 10. If a parent corporation owns stock (80% or more) in a subsidiary corporation and the parent corporation does not make the IRC section 338 election, and then, the subsidiary corporation liquidates and transfers all of the subsidiary corporation s assets to the parent corporation in return for the stock which the parent corporation owns in the subsidiary corporation, will Copyright 1986 Through 2006, Professor Jegen s Taxsite F-027B7-SpecialCorporateTransactions -13-

14 corporate attributes carryover from the liquidating corporation to the shareholder corporation? a. If your answer is yes, then state your statutory authorities for your answer. b. If your answer is no, then state your statutory authorities for your answer. 11. If a parent corporation owns stock (80% or more) in a subsidiary corporation and the parent corporation makes the IRC section 338 election, and then, the subsidiary corporation liquidates and transfers all of the subsidiary corporation s assets to the parent corporation in return for the stock which the parent corporation owns in the subsidiary corporation, will corporate attributes carryover from the liquidating corporation to the shareholder corporation? a. If your answer is yes, then state your statutory authorities for your answer. b. If your answer is no, then state your statutory authorities for your answer. E. You should take the time to read the following IRC sections again: IRC section 332(a); IRC section 311(a); IRC section 311(b); IRC section 336(a); IRC section 337(a); IRC section 338(a); IRC section 334(a); and, IRC section 334(b). VI. The statutory corporate dissolution provisions of the State of Indiana. With respect to corporation dissolutions, the State of Indiana provides as follows. A. Indiana Code Corporation that has not issued shares or commenced business. Sec. 1. a. A majority of the incorporators or initial directors of a corporation that has not issued shares or has not commenced business may dissolve the corporation by delivering to the secretary of state for filing articles of dissolution that set forth: (1) the name of the corporation; (2) the date of its incorporation; (3) either: (a) that none of the corporation's shares has been issued; or (b) that the corporation has not commenced business; (4) that no debt of the corporation remains unpaid; (5) that the net assets of the corporation remaining after winding up have been distributed to the shareholders, if shares were issued; and (6) that a majority of the incorporators or initial directors authorized the dissolution. 2. Proposal for dissolution; notice; adoption by shareholders. Sec. 2. a. A corporation's board of directors may propose dissolution for submission to the shareholders. b. For a proposal to dissolve to be adopted. (1) the board of directors must recommend dissolution to the shareholders unless the board of directors determines that because of conflict of interest or other special circumstances it should make no recommendation and communicates the basis for its determination to the shareholders; and (2) the shareholders entitled to vote must approve the proposal to dissolve as provided in subsection (e). c. The board of directors may condition its submission of the proposal for dissolution on any basis. d. The corporation shall notify each shareholder, whether or not entitled to vote, of the proposed shareholders' meeting in accordance with IC The notice must Copyright 1986 Through 2006, Professor Jegen s Taxsite F-027B7-SpecialCorporateTransactions -14-

15 also state that the purpose, or one (1) of the purposes, of the meeting is to consider dissolving the corporation. e. Unless the articles of incorporation or the board of directors (acting under subsection (c)) require a greater vote or a vote by voting groups, the proposal to dissolve to be adopted must be approved by a majority of all the votes entitled to be cast on that proposal. f. After a proposal for dissolution is adopted, the corporation shall give the notices required by IC , IC , and IC Filing of articles of dissolution; date of dissolution. Sec. 3. a. At any time after dissolution is authorized, the corporation may dissolve by delivering to the secretary of state for filing articles of dissolution setting forth the following: (1) The name of the corporation. (2) The date dissolution was authorized. (3) If dissolution was approved by the shareholders: (a) the number of votes entitled to be cast on the proposal to dissolve; and (b) either the total number of votes cast for and against dissolution or the total number of undisputed votes cast for dissolution and a statement that the number cast for dissolution was sufficient for approval.if voting by voting groups is required, the information required by this subdivision shall be separately provided for each voting group entitled to vote separately on the plan to dissolve. b. A corporation is dissolved upon the effective date of its articles of dissolution 4. Revocation of dissolution. Sec. 4. a. A corporation may revoke its dissolution within one hundred twenty (120) days of its effective date. b. Revocation of dissolution must be authorized in the same manner as the dissolution was authorized unless that authorization permitted revocation by action by the board of directors alone, in which event the board of directors may revoke the dissolution without shareholder action. c. After the revocation of dissolution is authorized, the corporation may revoke the dissolution by delivering to the secretary of state for filing articles of revocation of dissolution, together with a copy of its articles of dissolution, that set forth: (1) the name of the corporation; (2) the effective date of the dissolution that was revoked; (3) the date that the revocation of dissolution was authorized; (4) if the corporation's board of directors (or incorporators) revoked the dissolution, a statement to that effect; (5) if the corporation's board of directors revoked a dissolution authorized by the shareholders, a statement that revocation was permitted by action by the board of directors alone pursuant to that authorization; and (6) if shareholder action was required to revoke the dissolution, the information required by section 3(a)(3) of this chapter. d. Unless a delayed effective date is specified, revocation of dissolution is effective when articles of revocation of dissolution are filed. e. When the revocation of dissolution is effective, it relates back to and takes effect as of the effective date of the dissolution and the corporation resumes carrying on its business as if dissolution had never occurred. 5. Continuance of corporate existence; winding up affairs; effect of dissolution. Sec. 5. a. A dissolved corporation continues its corporate existence but may not carry on any business except that appropriate to wind up and liquidate its business and affairs, including: Copyright 1986 Through 2006, Professor Jegen s Taxsite F-027B7-SpecialCorporateTransactions -15-

16 (1) collecting its assets; (2) disposing of its properties that will not be distributed in kind to its shareholders; (3) discharging or making provision for discharging its liabilities; (4) distributing its remaining property among its shareholders according to their interests; and (5) doing every other act necessary to wind up and liquidate its business and affairs. b. Dissolution of a corporation does not: (1) transfer title to the corporation's property; (2) prevent transfer of its shares or securities, although the authorization to dissolve may provide for closing the corporation's share transfer records; (3) subject its directors or officers to standards of conduct different from those prescribed in IC through IC ; (4) change: (a) quorum or voting requirements for its board of directors or shareholders; (b) provisions for selection, resignation, or removal of its directors, or officers, or both; or (c) provisions for amending its bylaws; (5) prevent commencement of a proceeding by or against the corporation in its corporate name; (6) abate or suspend a proceeding pending by or against the corporation on the effective date of dissolution; or (7) terminate the authority of the registered agent of the corporation. 6. Disposition of known claims; procedure. Sec. 6. a. A dissolved corporation may dispose of the known claims against it by following the procedure described in this section. b. The dissolved corporation shall notify its known claimants in writing of the dissolution at any time after its effective date. The written notice must: (1) specify the amount that the dissolved corporation believes will satisfy the claim; (2) inform the creditor that it has the right to dispute the amount of the claim and describe the procedure for disputing the amount of the claim; (3) provide a mailing address where a dispute of the amount of the claim may be sent; (4) state the deadline, which may not be fewer than sixty (60) days after the effective date of the written notice, by which the dissolved corporation must receive the dispute of the amount of the claim; and (5) state that the claim will be fixed at the amount specified by the dissolved corporation if a dispute of the amount of the claim is not received by the deadline. c. If the amount of the claim is disputed, the claimant must notify the dissolved corporation of the dispute by the deadline. If the dissolved corporation rejects the disputed amount, the claimant must commence a proceeding to enforce the claim within ninety (90) days after the effective date of the dissolved corporation's rejection notice. d. The amount of the claim is fixed if: (1) the claimant does not notify the dissolved corporation by the deadline; or (2) the claimant who has notified the dissolved corporation of a dispute and has received a rejection notice does not commence a proceeding within ninety (90) days from the effective date of the rejection noice. e. Regardless of a dispute in the amount of the claim, the dissolved corporation must tender to the claimant the amount of the claim as set forth by the dissolved Copyright 1986 Through 2006, Professor Jegen s Taxsite F-027B7-SpecialCorporateTransactions -16-

17 corporation in the notice of claim within thirty (30) days after the earliest of the following dates: (1) The date that the claim becomes fixed. (2) The date that the claimant commences the proceeding to enforce the claim. f. For purposes of this section, "claim" does not include a contingent liability or a claim based on an event occurring after the effective date of dissolution. 7. Notice of dissolution; claims against dissolved corporation. Sec. 7. a. A dissolved corporation may also publish notice of its dissolution and request that persons with claims against the corporation present them in accordance with the notice. b. The notice must: (1) be published one (1) time in a newspaper of general circulation in the county where the dissolved corporation's principal office (or, if none in Indiana, its registered office) is or was last located; (2) describe the information that must be included in a claim and provide a mailing address where the claim may be sent; and (3) state that a claim against the corporation will be barred unless a proceeding to enforce the claim is commenced within two (2) years after the publication of the notice. c. If the dissolved corporation publishes a newspaper notice in accordance with subsection (b), the claim of each of the following claimants is barred unless the claimant commences a proceeding to enforce the claim within two (2) years after the publication date of the newspaper notice: (1) A claimant who did not receive written notice under section 6 of this chapter. (2) A claimant whose claim was timely sent to the dissolved corporation but not acted on. (3) A claimant whose claim is contingent or based on an event occurring after the effective date of dissolution. d. A claim may be enforced under this section: (1) against the dissolved corporation, to the extent of its undistributed assets; or (2) if the assets have been distributed in liquidation, against a shareholder of the dissolved corporation to the extent of the shareholder's pro rata share of the claim or the corporate assets distributed to the shareholder in liquidation, whichever is less, but a shareholder's total liability for all claims under this section may not exceed the total amount of assets distributed to the shareholder. B. Indiana Code Grounds. Sec. 1. a. The secretary of state may commence a proceeding under section 2 of this chapter to administratively dissolve a corporation if: (1) the corporation does not pay within sixty (60) days after they are due any franchise taxes or penalties imposed by this article or other law; (2) the corporation does not deliver for filing its biennial report to the secretary of state within sixty (60) days after it is due; (3) the corporation is without a registered agent or registered office in this state for sixty (60) days or more; (4) the corporation does not notify the secretary of state within sixty (60) days that its registered agent or registered office has been changed, that its registered agent has resigned, or that its registered office has been discontinued; or (5) the corporation's period of duration stated in its articles of incorporation Copyright 1986 Through 2006, Professor Jegen s Taxsite F-027B7-SpecialCorporateTransactions -17-