Corporations: Redemptions and Liquidationsisu.indstate.edu/acharmo/acct404pdf/CH19comp.pdf · tax...
Transcript of Corporations: Redemptions and Liquidationsisu.indstate.edu/acharmo/acct404pdf/CH19comp.pdf · tax...
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Chapter 19Chapter 19
Corporations: Distributions in Complete Liquidation and an Overview of
Reorganizations
Corporations: Distributions in Complete Liquidation and an Overview of
Reorganizations
Eugene Willis, William H. Hoffman, Jr.,Eugene Willis, William H. Hoffman, Jr.,David M. Maloney and William A. RaabeDavid M. Maloney and William A. Raabe
Copyright ©2004 SouthCopyright ©2004 South--Western/Thomson LearningWestern/Thomson Learning
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C19 - 2
Liquidations-In GeneralLiquidations-In General
• Corporation winds up affairs, pays debts, and distributes remaining assets to shareholders– Produces sale or exchange treatment to
shareholder– Liquidating corporation recognizes gains and
losses upon distribution of its assets, with certain exceptions
• Corporation winds up affairs, pays debts, and distributes remaining assets to shareholders– Produces sale or exchange treatment to
shareholder– Liquidating corporation recognizes gains and
losses upon distribution of its assets, with certain exceptions
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C19 - 3
Liquidations-Effect On Corporation(slide 1 of 3)
Liquidations-Effect On Corporation(slide 1 of 3)
• Gain or loss is recognized by corporation on distribution in complete liquidation– Loss may be disallowed or limited if:
• Property distributed to related parties, or• Property distributed has built-in losses
– Property treated as if sold for FMV– Result:
• Liquidating distribution subject to corporate level tax (gain), and shareholder level tax (receipt of proceeds)
• Gain or loss is recognized by corporation on distribution in complete liquidation– Loss may be disallowed or limited if:
• Property distributed to related parties, or• Property distributed has built-in losses
– Property treated as if sold for FMV– Result:
• Liquidating distribution subject to corporate level tax (gain), and shareholder level tax (receipt of proceeds)
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Liquidations-Effect On Corporation(slide 2 of 3)
Liquidations-Effect On Corporation(slide 2 of 3)
• Limitations on losses-Related Party Situations– Losses are disallowed on liquidating distributions to
related parties if:• Distribution is not pro rata
– In pro rata distributions, each shareholder receives their share of each asset
• Property distributed is disqualified property– Disqualified property is property acquired by corp in a §351
transaction during the five-year period ending on date of distribution
• Limitations on losses-Related Party Situations– Losses are disallowed on liquidating distributions to
related parties if:• Distribution is not pro rata
– In pro rata distributions, each shareholder receives their share of each asset
• Property distributed is disqualified property– Disqualified property is property acquired by corp in a §351
transaction during the five-year period ending on date of distribution
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Liquidations-Effect On Corporation(slide 3 of 3)
Liquidations-Effect On Corporation(slide 3 of 3)
• Limitations on losses-Built-in Loss Situations– Losses are disallowed when property
distributed was acquired in a §351 transaction and principal purpose was to cause recognition of loss by corp on liquidation
– Purpose is presumed if transfer occurs within two years of adopting liquidation plan
• Limitations on losses-Built-in Loss Situations– Losses are disallowed when property
distributed was acquired in a §351 transaction and principal purpose was to cause recognition of loss by corp on liquidation
– Purpose is presumed if transfer occurs within two years of adopting liquidation plan
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Distribution of Loss Property in Liquidation
Distribution of Loss Property in Liquidation
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Liquidations-Effect On Shareholder (slide 1 of 2)
Liquidations-Effect On Shareholder (slide 1 of 2)
• Gain or loss recognized on receipt of property from liquidating corporation– Amount = FMV of property received - basis in
stock• Generally, capital gain or loss
– Basis in assets received in liquidating distribution = FMV on date of distribution
• Gain or loss recognized on receipt of property from liquidating corporation– Amount = FMV of property received - basis in
stock• Generally, capital gain or loss
– Basis in assets received in liquidating distribution = FMV on date of distribution
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Liquidations-Effect On Shareholder (slide 2 of 2)
Liquidations-Effect On Shareholder (slide 2 of 2)
– Special rule for installment obligations• Shareholder may defer gain recognition to point of
collection• Corporation must recognize all gain on distribution
– Special rule for installment obligations• Shareholder may defer gain recognition to point of
collection• Corporation must recognize all gain on distribution
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Liquidations: Parent-Subsidiary Situations (slide 1 of 4)
Liquidations: Parent-Subsidiary Situations (slide 1 of 4)
• Parent corporation does not recognize gain or loss on liquidation of subsidiary– Also, subsidiary recognizes no gain or loss on
property distributions to its parent
• Parent corporation does not recognize gain or loss on liquidation of subsidiary– Also, subsidiary recognizes no gain or loss on
property distributions to its parent
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Liquidations: Parent-Subsidiary Situations (slide 2 of 4)
Liquidations: Parent-Subsidiary Situations (slide 2 of 4)
• To qualify:– Parent must own at least 80% of voting stock
and value of subsidiary’s stock– Subsidiary must distribute all property within
three years from first distribution– Subsidiary must be solvent
• To qualify:– Parent must own at least 80% of voting stock
and value of subsidiary’s stock– Subsidiary must distribute all property within
three years from first distribution– Subsidiary must be solvent
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Liquidations: Parent-Subsidiary Situations (slide 3 of 4)
Liquidations: Parent-Subsidiary Situations (slide 3 of 4)
• Liquidating distributions to minority shareholders – Treated same way as nonliquidating
distribution• Distributing corp recognizes gain but not loss• Minority shareholders recognize gain or loss
– Amount=FMV of property received-basis in stock
• Liquidating distributions to minority shareholders – Treated same way as nonliquidating
distribution• Distributing corp recognizes gain but not loss• Minority shareholders recognize gain or loss
– Amount=FMV of property received-basis in stock
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Liquidations: Parent-Subsidiary Situations (slide 4 of 4)
Liquidations: Parent-Subsidiary Situations (slide 4 of 4)
• Basis of property received by parent– Has same basis as subsidiary’s basis (unless
election is made under §338)• Parent’s basis in subsidiary’s stock disappears• Parent acquires tax attributes of subsidiary
– e.g., NOLs, business credit carryovers, capital loss carryovers, subsidiary’s E & P
• May result in some inequities
• Basis of property received by parent– Has same basis as subsidiary’s basis (unless
election is made under §338)• Parent’s basis in subsidiary’s stock disappears• Parent acquires tax attributes of subsidiary
– e.g., NOLs, business credit carryovers, capital loss carryovers, subsidiary’s E & P
• May result in some inequities
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Election Under §338 (slide 1 of 4)
Election Under §338 (slide 1 of 4)
• Parent may elect to treat acquisition of stock in acquired corp as a purchase of the acquired corp.'s assets if:– Election is made by fifteenth day of ninth
month following qualified stock purchase• Qualified stock purchase occurs when corp acquires
stock representing at least 80% of voting power and value within a 12-month period
• Must be acquired in taxable transaction– Stock purchases by affiliated group members count
• Parent may elect to treat acquisition of stock in acquired corp as a purchase of the acquired corp.'s assets if:– Election is made by fifteenth day of ninth
month following qualified stock purchase• Qualified stock purchase occurs when corp acquires
stock representing at least 80% of voting power and value within a 12-month period
• Must be acquired in taxable transaction– Stock purchases by affiliated group members count
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Election Under §338(slide 2 of 4)
Election Under §338(slide 2 of 4)
• Tax Consequences– Parent corp has basis in subsidiary’s assets =
basis in subsidiary’s stock• Subsidiary may, but need not, be liquidated
• Tax Consequences– Parent corp has basis in subsidiary’s assets =
basis in subsidiary’s stock• Subsidiary may, but need not, be liquidated
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Election Under §338(slide 3 of 4)
Election Under §338(slide 3 of 4)
• Tax Consequences (cont’d)– Subsidiary is deemed to have sold its assets for
an amount determined with reference to parent’s basis in subsidiary’s stock, adjusted for liabilities of subsidiary
• Tax Consequences (cont’d)– Subsidiary is deemed to have sold its assets for
an amount determined with reference to parent’s basis in subsidiary’s stock, adjusted for liabilities of subsidiary
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Election Under §338(slide 4 of 4)
Election Under §338(slide 4 of 4)
• Tax Consequences (cont’d)– Gain or loss is recognized by subsidiary– Subsidiary is treated as a new corporation that
purchased all of its assets on the day after the acquisition date
• Tax Consequences (cont’d)– Gain or loss is recognized by subsidiary– Subsidiary is treated as a new corporation that
purchased all of its assets on the day after the acquisition date
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Reorganizations-In GeneralReorganizations-In General
• Refers to any corporate restructuring that may be tax-free under §368– To qualify, must meet certain general
requirements:• Must be a plan of reorganization• Must meet continuity of interest and continuity of
business enterprise tests• Must have a sound business purpose• Tax-free status can be denied under step transaction
doctrine
• Refers to any corporate restructuring that may be tax-free under §368– To qualify, must meet certain general
requirements:• Must be a plan of reorganization• Must meet continuity of interest and continuity of
business enterprise tests• Must have a sound business purpose• Tax-free status can be denied under step transaction
doctrine
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Summary of Different Types Of Reorganizations
Summary of Different Types Of Reorganizations
• The term reorganization includes:– Statutory merger and consolidation– Stock for stock exchange– Stock for assets exchange– Divisive exchange– Recapitalization– Change in identity, form, or place of organization– Transfers in bankruptcy or receivership
• The term reorganization includes:– Statutory merger and consolidation– Stock for stock exchange– Stock for assets exchange– Divisive exchange– Recapitalization– Change in identity, form, or place of organization– Transfers in bankruptcy or receivership
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Tax Free Reorganization Consequences, in General (slide 1 of 3)
Tax Free Reorganization Consequences, in General (slide 1 of 3)
• Consequences to Acquiring Corporation– No gain or loss recognized unless it transfers
property to the target corporation as part of the transaction
– Basis of property received retains basis it had in hands of target corp plus any gain recognized by the target
• Consequences to Acquiring Corporation– No gain or loss recognized unless it transfers
property to the target corporation as part of the transaction
– Basis of property received retains basis it had in hands of target corp plus any gain recognized by the target
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Tax Free Reorganization Consequences, in General (slide 2 of 3)
Tax Free Reorganization Consequences, in General (slide 2 of 3)
• Consequences to Target Corporation– No gain or loss unless it retains “other
property” received in exchange or it distributes its own property to shareholders
• Consequences to Target Corporation– No gain or loss unless it retains “other
property” received in exchange or it distributes its own property to shareholders
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Tax Free Reorganization Consequences, in General (slide 3 of 3)
Tax Free Reorganization Consequences, in General (slide 3 of 3)
• Consequences to Target or Acquiring Co. Shareholders– No gain or loss unless shareholders receive
cash or other property– Basis of shares received is same as basis of
those surrendered, decreased by boot received, increased by gain and dividend income, if any, recognized in the transaction
• Consequences to Target or Acquiring Co. Shareholders– No gain or loss unless shareholders receive
cash or other property– Basis of shares received is same as basis of
those surrendered, decreased by boot received, increased by gain and dividend income, if any, recognized in the transaction
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Judicial Doctrines (slide 1 of 2)Judicial Doctrines (slide 1 of 2)
• Besides meeting specific requirements of reorganization, several judicially created doctrines must be met – Reorganization must exhibit a sound business purpose
• Not a well defined test
– Continuity of interest test• IRS deems this test met if shareholders of Target receive stock
in Acquirer equal to at least 50% of value of Target stock
• Besides meeting specific requirements of reorganization, several judicially created doctrines must be met – Reorganization must exhibit a sound business purpose
• Not a well defined test
– Continuity of interest test• IRS deems this test met if shareholders of Target receive stock
in Acquirer equal to at least 50% of value of Target stock
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Judicial Doctrines (slide 2 of 2)Judicial Doctrines (slide 2 of 2)
– Continuity of business enterprise test• Requires the acquiring corp to either:
– Continue the Target’s historic business, or– Use a significant portion of Target’s assets in business
– Step transaction doctrine• Ensures that a series of transactions are not used to obtain tax
benefits that would be unavailable if the transaction were accomplished in a single step
• IRS generally views any transactions occurring within one year of reorganization as part of the restructuring
– Continuity of business enterprise test• Requires the acquiring corp to either:
– Continue the Target’s historic business, or– Use a significant portion of Target’s assets in business
– Step transaction doctrine• Ensures that a series of transactions are not used to obtain tax
benefits that would be unavailable if the transaction were accomplished in a single step
• IRS generally views any transactions occurring within one year of reorganization as part of the restructuring
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Carryover Of Corporate Tax Attributes (slide 1 of 4)
Carryover Of Corporate Tax Attributes (slide 1 of 4)
• Assumption of liabilities– Acquiring corp either assumes liabilities of
Target or takes property subject to liabilities• Allowance of Carryovers
– In Type A, C, acquisitive D, F, and G reorganizations, the Target’s tax attributes are acquired
– In Type B reorganizations, Target retains its assets and tax attributes
• Assumption of liabilities– Acquiring corp either assumes liabilities of
Target or takes property subject to liabilities• Allowance of Carryovers
– In Type A, C, acquisitive D, F, and G reorganizations, the Target’s tax attributes are acquired
– In Type B reorganizations, Target retains its assets and tax attributes
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Carryover Of Corporate Tax Attributes (slide 2 of 4)
Carryover Of Corporate Tax Attributes (slide 2 of 4)
• NOL Carryovers– Amount of NOL that can be used in first tax
year after ownership change is limited to a percentage representing the remaining days in the tax year over the total number of days in the year
• NOL Carryovers– Amount of NOL that can be used in first tax
year after ownership change is limited to a percentage representing the remaining days in the tax year over the total number of days in the year
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Carryover Of Corporate Tax Attributes (slide 3 of 4)
Carryover Of Corporate Tax Attributes (slide 3 of 4)
• NOL Carryovers (cont’d)– NOL can be further limited in first and succeeding
years if:• An owner shift occurs
– Generally, a change in stock ownership of a 5 percent shareholder
• An equity structure shift occurs
– NOL can be used to the extent of the value of the loss corp’s stock on the date of the ownership change multiplied by the long-term tax-exempt rate
• NOL Carryovers (cont’d)– NOL can be further limited in first and succeeding
years if:• An owner shift occurs
– Generally, a change in stock ownership of a 5 percent shareholder
• An equity structure shift occurs
– NOL can be used to the extent of the value of the loss corp’s stock on the date of the ownership change multiplied by the long-term tax-exempt rate
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Carryover Of Corporate Tax Attributes (slide 4 of 4)
Carryover Of Corporate Tax Attributes (slide 4 of 4)
• Earnings and Profits– Positive E & P of acquired corp carries over– E & P of a deficit corp are deemed received by
acquiring corp as of change date • Deficit may only be used to offset E & P
accumulated by acquiring corp after the date of transfer
• Earnings and Profits– Positive E & P of acquired corp carries over– E & P of a deficit corp are deemed received by
acquiring corp as of change date • Deficit may only be used to offset E & P
accumulated by acquiring corp after the date of transfer
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Comparison of Reorganization Types (slide 1 of 5)
Comparison of Reorganization Types (slide 1 of 5)
Type Advantages Disadvantages
A. Merger/ Consolidation
Consideration need not be voting stock
State law may give dissenters rights or require s/holder mtgs.
Up to 50% of consideration can be in cash
All liabilities of Target are assumed by Acquirer
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C19 - 29
Comparison of Reorganization Types (slide 2 of 5)
Comparison of Reorganization Types (slide 2 of 5)
Type Advantages Disadvantages
B. Stock-for- Stock
Stock can be acq’d from shareholders
Only voting stock of Acquirer can be used
Procedures are not complex
Must have 80% control of Target-May have minority after reorg.
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Comparison of Reorganization Types (slide 3 of 5)
Comparison of Reorganization Types (slide 3 of 5)
T yp e A d va n ta g e s D isa d va n ta g e s
C . S to ck -fo r-A sse ts
L e ss co m p le x a s to s ta te la w th a n “A ”
“S u b s ta n tia lly a ll” a sse ts o f T a rg e t m u s t b e tra n s fe rre d
C a sh o r p ro p e rty a re O K co n s id e ra tio n if 2 0 % o r le ss o f F M V o f p ro p e rty tra n s fe rre d
L ia b ilit ie s co u n t a s “o th e r p ro p e rty ” fo r 2 0 % te s t if a n y o th e r co n s id e ra tio n u se d . T a rg e t m u s t d is tr ib u te a sse ts re c ’d to s /h o ld e rs
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C19 - 31
Comparison of Reorganization Types (slide 4 of 5)
Comparison of Reorganization Types (slide 4 of 5)
Type Advantages
D. Division (generally)
Perm its corporate division without tax consequences if no boot is involved
E. Recapitalization Allows for major change in makeup of shareholders’ equity without gain recognition requirement
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Comparison of Reorganization Types (slide 5 of 5)
Comparison of Reorganization Types (slide 5 of 5)
Type Advantages F. Change in form, identity, or place of organization
Survivor is treated as same entity as predecessor; tax attributes of predecessor can be carried back or forward
G. Court approved reorganization
Creditors can exchange notes for stock tax-free and state merger laws need not be followed
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If you have any comments or suggestions concerning this PowerPoint Presentation for West's Federal Taxation, please contact:
Dr. Donald R. Trippeer, CPA [email protected]
Colorado State University-Pueblo
If you have any comments or suggestions concerning this PowerPoint Presentation for West's Federal Taxation, please contact:
Dr. Donald R. Trippeer, CPA [email protected]
Colorado State University-Pueblo