Sec. 331. Gain or loss to shareholders in corporate liquidations
 
    (a) Distributions in complete liquidation treated as exchanges
      Amounts received by a shareholder in a distribution in complete
    liquidation of a corporation shall be treated as in full payment in
    exchange for the stock.
 

Sections 331(a), (b) Ex.1, 334(a) Ex. 1, 336(a) Ex.1

 
 

Treatment of liquidation:  X has realized and recognized gain of 100 = 300 – 200.  §336(a).  A has realized and recognized gain of 175 = 300 – 125, typically long-term capital gain.  §331(a).  (But, who pays X’s tax from the liquidation if X has transferred all of its assets?  See, §§6901 et. seq. regarding transferee liability.)  The distribution in liquidation is generally not treated as a §301 distribution. §331(b).  Accordingly, the earnings and profits are irrelevant and disappear – they are not transferred.  A receives a FMV basis of 300 in the assets received, §334(a), and a new holding period.

 
 
    (b) Nonapplication of section 301
      Section 301 (relating to effects on shareholder of distributions
    of property) shall not apply to any distribution of property (other
    than a distribution referred to in paragraph (2)(B) of section
    316(b)) in complete liquidation.
 

Sections 331(a), (b) Ex.1, 334(a) Ex. 1, 336(a) Ex.1

 
 

Treatment of liquidation:  X has realized and recognized gain of 100 = 300 – 200.  §336(a).  A has realized and recognized gain of 175 = 300 – 125, typically long-term capital gain.  §331(a).  (But, who pays X’s tax from the liquidation if X has transferred all of its assets?  See, §§6901 et. seq. regarding transferee liability.)  The distribution in liquidation is generally not treated as a §301 distribution. §331(b).  Accordingly, the earnings and profits are irrelevant and disappear – they are not transferred.  A receives a FMV basis of 300 in the assets received, §334(a), and a new holding period.

 
 
 

Sections 331(b) Ex. 2, 316(b)(2)

 
 

Assumptions:  E&P accumulated as of the beginning of the year is 0.  E&P for the current year (i.e., prior to the liquidation) = 30.  X is a personal holding company and undistributed personal holding company income (before dividend paid deduction) = 50.  The liquidation occurs within 24 months after adoption of the plan.  The corporation designates 45 of the liquidating distribution as a dividend and so notifies A of this fact.

 

Treatment:  While a liquidating distribution is normally not treated as a dividend, a different rule applies here.  §331(b).  Here, because X is a personal holding company which liquidated within 24 months of adopting a plan to do so, and A is not a corporation and X designates 45 of the distribution as a dividend (and so notifies A), X is considered as having paid a dividend of 45.  §316(b)(2). Accordingly, in computing its personal holding company tax, X is allowed a dividend paid deduction of 45.

 
 
    (c) Cross reference
          For general rule for determination of the amount of gain or
        loss recognized, see section 1001.