Discussions and homework support for your

Accounting Class

Liquidating Distributions of Corporations

Chapter 6: Liquidating Distributions of Corporation

Motivator for Liquidation

  1. Tax reason (principal motivation)
  2. Business reason

Liquidation is conducted if:

  1. assets are resulting to losses

            -SH prefer to hold in incorporated form and reduce to personal tax return


  1. Passive activity
  2. At-risk
  3. Excess business loss
  4. corporate earnings taxed once under the income tax of corporation
  5. when earnings are distributed as dividends
  6. when SH exchanges stock for gain

    *the act of liquidation = assets held to unincorporated form = avoid double tax

iii. Additionally, may claim 20% reduction for qualified business income

  1. Reduce tax rate below effective tax rate on the income of the corporation


Complete Liquidation

Under Reg. Sec. 1.332-2 (c)

  • Distributions under liquidation corp. must redeem all stocks or cancel
  • One or more distribution, corporation should be:
  1. liquidating status
  2. distribution should be under the plan
  • Distribution before plan of liqidation = taxed to SH through dividends/ redeemed stocks


  • Legal phrase that organization undertaken dissolution
  • Cannot happen if corporation retains charter for name of corporation acquired by another
  • Corporation can settle for tax reasons without undertaking dissolution


  • Reg. 1.332-2(c) – Corporation termination concern and interests
  • winding up its activities
  • debt payment
  • shareholder property distribution




Liquidation General Rules

  1. Effect to Shareholders

Amount of Loss or Gain

-Under Sec. 331 (a):

            -liquidation distribution transferred to shareholder = full payment for SH stock

            – if SH acquire liabilities, then:

                        – these liabilities reduce value realized by SH



  1. Accounting Method Impact

            -Accounting method, if Accrual:

  1. Shareholder acknowledge loss or gain

*Cash method

  1. Sharehoder report loss/gain when actual liquidating upon distribution receipt acceptance
  2. Stock Acquisition

            -SH may have acquire stock in different time/ amount

                        -SH must compute G/L separately

  1. Recognized Gain or Loss Character

            -Corporation stock liquidation (Capital Asset for Shareholder)

                        Two exemptions:

  1. Loss recognized by individual SH under sec. 1244

                                                *Where stock is within limits, considered ordinary loss

  1. Loss recognized by corp. SH on the subsidiary stock worthlessness

                                                **where stock is considered ordinary loss under sec. 165 (g) (3)




Holding Period of Property and Its basis

            -Under Sec. 334 (a)

                        -Basis of SH’s property received is:

  1. FMV on distribution date
  2. property distribution upon date of distribution


Liquidation for Shareholder (Non-Subsidiary)

Under Sec. 331 (Shareholder):

  • loss/ gain as if traded stock
  • liabilities are assume less realized value (not under ZERO)
  • Basis adjusted(Property received) = FMV (under Sec. 334 (a))
  • After liquidation marks holding period date

Corporation Liquidation

Two Key questions:

  1. What is the character and amount of recognized loss/gain?
  2. What happens to tax attributies prior to liquidation?



Liquidation for Corporation (Non-Subsidiary)

Under Sec. 336 (Corporation):

  • loss/ gain as if sold property (meant for FMV)
  • liabilities assumed ≠ fmv property distributed
  • Attributes of tax (e.g., carryovers, E&P, NOLS) vanish

Corporation Liquidation limitation related person (Non-subsidiary)

No loss permitted if:

  • distribution to related person satisfies:

à 50% of family and shareholder attribution

                                                *Under sec. 267, this includes

  1. Sisters
  2. Brothers
  3. Lineal relatives
  4. Ancestors,
  • and or;
  1. non-pro rata distribution of property loss across shareholder, and or;
  2. Sec.351 acquired property/ capt’l contribution are distributed in 5 yrs


Tax Avoidance purpose, Corporation Loss limitation (Non-subsidiary Liquidation)

Tax Avoidance purpose

            -property acquired to take liquidation loss

-determination of loss

                        * basis reduced to FMV (prior to collection on exchange, distb’n, or sale, if:

  • Acquired , given that it is:

*w/in 2 years of liquidation plan)

  • not if asset is employed in either:

* business or trade

  • not if disposed

*on the first 2 years of the existence of corporation

Liquidation (Subsidiary)

Corporate shareholder

            -has 100% vote

            -subsidiary amount of corporation




Under Sec. 332 (Shareholder):

  • NO loss/ gain
  • basis in assets = carryover (under sec. 334 (b))
  • Subsidiary stock basis (recedes)
  • After liquidation marks holding period date

Under Sec. 337 (Corporation):

  • NO loss/ gain
  • Attributes of tax to shareholders + recapture depreciation

Hybrid Liquidation

  • Corporate shareholder (and other SH, either individual or corporate) plus 80%


  • 80% + NO loss/ gain acknowledged
  • other SH acknowledge loss/gain on sold stock
  • basis of asset carryover allocated to 80% plus corp. SH (basis of FMV to another)


  • NO loss/ gain acknowledged for allocated Assets + corp. Shareholder
  • Asset Gain if allocated to another Shareholder
  • No Loss on allocation of any asset to ANY Shareholder

Accounting Homework

Stuck with a homework question?  Find quick answer to Accounting homeworks

Ask Accounting Tutors

Need help understanding a concept? Ask our Accounting tutors

Accounting Exams

Get access to our databanks of Discussion questions and Exam questions

How We Safeguard Your Tutor Quality

All tutors are required to have relevant training and expertise in their specific fields before they are hired.  Only qualified and experienced tutors can join our team 

All tutors must pass our lengthy tests and complete intensive interview and selection process before they are accepted in our team


Prior to assisting our clients, tutors must complete comprehensive trainings and seminars to ensure they can adequately perform their functions

Interested in becoming a tutor with Online Class Ready?

Share your knowledge and make money doing it

1. Be your own boss

2. Work from home

3. Set your own schedule