When a parent corporation liquidates a subsidiary, the tax consequences are very different than in a nonsubsidiary liquidation. Under § 332(a), the parent recognizes no gain or loss on the receipt of the subsidiary’s assets. And under § 337(a), the subsidiary recognizes no gain or loss on the distribution.
The parent’s basis in the assets is the same as the subsidiary’s basis (carryover basis). § 334(b)(1). The parent also succeeds to the subsidiary’s tax attributes, including E&P, NOLs, and capital loss carryovers. § 381.
For § 332 to apply, the parent must own at least 80% of the subsidiary’s stock by vote and value from the time the plan is adopted until the distribution is complete. § 332(b)(1). The distribution must be in complete cancellation of the subsidiary’s stock. § 332(b)(2) or (3).
Granite Trust Co. v. United States, 238 F.2d 670 (1st Cir. 1956), shows how a parent can deliberately avoid § 332 to recognize a loss. Granite Trust owned all the stock of a subsidiary. It wanted to recognize a loss on the liquidation. So it sold 20.5% of the subsidiary’s stock to a third party and gave away another 2 shares to charity, reducing its ownership to less than 80%. The courts held the liquidation was taxable. The IRS argued the sales should be disregarded as tax avoidance, but the First Circuit said tax avoidance doesn’t make a transaction a sham.
But there are limits. Rev. Rul. 70‑106, 1970‑1 C.B. 70, held that if a parent owns 75% and causes the subsidiary to redeem the minority’s shares before adopting a plan, the parent still owns only 75% at the time the plan is adopted – so no § 332. Rev. Rul. 75‑521, 1975‑2 C.B. 120, distinguished a parent that bought the minority’s shares for cash – that was a separate transaction, so § 332 applied.
So if you want to avoid § 332, sell the shares before adopting the plan. If you want § 332, buy the shares before adopting the plan.
This article is for general informational purposes only and is subject to change. Tax laws are complex and vary by situation. You should consult a qualified professional for advice specific to your circumstances. For questions, contact Alan Goldstein.
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