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Liquidating a controlled C corporation subsidiary.

A corporate liquidation generally requires the liquidating corporation to recognize gain or loss on the distribution of its property in a complete liquidation as if the property were sold at its fair market value (FMV); see Sec. 336(a). However, under Sec. 337(a), no gain or loss is recognized by a liquidating subsidiary on a distribution in complete liquidation to an 80%-or-greater controlling parent company.

Avoiding Gain Recognition

According to Sec. 332(b), the parent recognizes no gain or loss on the receipt of property distributed in complete liquidation of a subsidiary, if two criteria are met:

1. On the date of the adoption of the liquidation plan, and at all times thereafter until receipt of the distribution, the parent receiving the property was the owner of stock possessing at least 80% of the subsidiary's total voting power and at least 80% of the total value of the subsidiary's stock.

2. The distribution is either:

* In complete cancellation or redemption of all of the subsidiary's stock, and the transfer of all the property occurs within the tax year; or

* One of a series of distributions in complete redemption, and the transfer of all of the subsidiary's property is to be completed within three years of the close of the tax year during which the first distribution is made under the liquidation plan.


Parco, Inc. is an S corporation that owns 100% of the stock of Subco, Inc., a C corporation. Parco's stock is held by a small number of shareholders who want to liquidate Subco to lessen the administrative costs of operating the two companies. Because Subco holds substantially appreciated assets, the shareholders are concerned about the tax cost of liquidating the subsidiary.

Parco's liquidation of Subco meets the criteria of Secs. 337 and 332; thus, Parco will be able to adopt a liquidation plan and immediately distribute Subco's assets in a tax-free liquidation. However, the assets Parco receives will be subject to the Sec. 1374 built-in gain (BIG) tax for the 10-year period beginning on the date received.


A corporation that has always been an S corporation generally is not subject to the BIG tax. However, under Sec. 1374(d)(8) and Regs. Sec. 1.1374-8(a), an S corporation will become subject to the tax if it acquires transferred- (substituted-) basis property from a C corporation. Property has a transferred basis if its basis in the hands of the acquiring entity is determined (in whole or part), by reference to the asset's basis in the transferor's hands. In the above example, the property Parco receives from Subco will take a transferred basis under Sec. 334(b)(1) and, thus, will be subject to the BIG tax.

Regs. Sec. 1.1374-8(b) and (d) further clarify that separate determinations of BIG tax are made for (1) assets held by the S corporation on the date S status is elected and (2) transferred-basis assets subsequently acquired from a C corporation. Thus, the 10-year recognition period for the assets Parco receives from Subco will be measured from the date Parco acquires them. Any loss carry forwards acquired from Subco can only offset the net recognized BIG attributable to assets acquired in the same transaction.

Editor's note: This case study has been adapted from PPC's Tax Planning Guide-S Corporations, 19th Edition, by Andrew R. Biebl, Gregory B. McKeen, George M. Carefoot and James A. Keller, published by Practitioners Publishing Company, Ft. Worth, TX, 2004 ((800) 323-8724;

Albert B. Ellentuck, Esq.

Of Counsel

King & Nordlinger, L.L.P.

Arlington, VA
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Author:Ellentuck, Albert B.
Publication:The Tax Adviser
Date:Apr 1, 2006
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