Sec. 332. Complete liquidations of subsidiaries
 
 (a) General rule
 No gain or loss shall be recognized on the receipt by a
 corporation of property distributed in complete liquidation of
 another corporation.
 

Sections 332(a) Ex. 1, 334(b)(1) Ex.1, 337(a) Ex. 1, (c) Ex. 1, 381(a)(1) Ex. 1, (c)(2)(A) Ex. 1

P does not recognize its realized gain of 175 on the liquidation of its 80% o greater owned subsidiary. §332(a). The subsidiary S also recognizes no gain on the distribution to P, an 80-percent distributee. §§337(a),(c). P will take a carryover basis of 200 in the S assets, §334(b)(1), and a tacked holding period, §1223(2). P will succeed to S’s E&P of 60, increasing P’s E&P to 130. §§381(a)(1), (c)(2)(A). P’s AB of 125 in S disappears.

Sections 332(a) Ex. 2, 336(a) Ex. 2, 381(a)(1) Ex.2, (c)(2) Ex. 2

Assumptions: S distributes to P assets with a FMV of 243 and AB of 125. S distributes to A assets with a FMV of 57 and AB of 50.

Treatment: P, the 80-percent distributee, does not recognize a realized gain of 188 (243 – 125). §332(a). A does recognize A’s realized gain of 37 (57 – 20). §331(a). S does not recognize its realized gain of 93 (243 – 150) on the distribution of assets to P. §337(a). S does recognize its realized gain of 7 (57 – 50) on its distribution of assets to A. §336(a). P will receive a carryover basis of 150 in its assets received while A will receive a FMV basis of 57 in the S assets received. §§334(b)(1) and (a), respectively. Only P will have a tacked holding period in the assets received. §1223(2). P will succeed to all of S’s E&P of 60, increasing P’s E&P to 130.

Sections 332(a) Ex.3, 334(b)(1) Ex. 2, 337(b)(1)

Assumptions: P loaned 40 to S, which is the current amount S owes P. All S assets go to P.

Treatment: S assets worth 40 are deemed transferred in satisfaction of debt. The remaining S assets, worth 160, are deemed transferred with respect to P’s stock in S. The assets received by P in satisfaction of debt are not treated by P under §332, but no gain or loss is realized (40 – 40 = 0), therefore no gain or loss is recognized. The S assets worth 160 received by P as a S shareholder are treated under §332 – therefore P does not recognized its realized gain of 35. S does not recognize realized gain from its transfer in exchange for either its debt owed to P (§337(b)(1)) or the S stock owned by P (§337(a)). P receives a carryover basis of 100 in the S assets.

 
 
 (b) Liquidations to which section applies
 For purposes of this section, a distribution shall be considered
 to be in complete liquidation only if -
 (1) the corporation receiving such property was, on the date of
 the adoption of the plan of liquidation, and has continued to be
 at all times until the receipt of the property, the owner of
 stock (in such other corporation) meeting the requirements of
 section 1504(a)(2); and either
 

Section 332(b)(1) Ex. 1

Assumptions: S adopts a plan to liquidate prior to the distribution of assets to P in liquidation. After this distribution of assets to P in liquidation, P sells its S stock to X and then S completes its liquidation. Also, the step-transaction and constructive receipt doctrines are assumed to not apply.

Treatment: Because P does not own the requisite 80% or more of S at all times between the adoption of the plan to liquidate and the receipt of the final liquidating distribution, §332 does not apply to any of the distributions. §332(b)(1). See also Reg. §1.332-2(a) and CIR v. Zimmerman, Inc., 151 F2d 517 (3d. Cir. 1945).

Section 332(b)(1) Ex. 2

Assumptions: P has long held 70% of S, and then acquires A’s 12% of S, bringing P’s total S ownership to 82%. After that stock purchase, S adopts a plan of liquidation, then liquidates, distributing assets with FMVs of 246 to P, and 54 to B. It is further assumed that an adoption of a plan to liquidate will not be deemed to have occurred prior to P’s purchase of A’s S stock.

Treatment: §332 applies to the distribution to P (but not to B) because P owns at least 80% of the S stock from the time that S adopts a plan to liquidate through the time of the liquidating distributions.

 
 
 (2) the distribution is by such other corporation in complete
 cancellation or redemption of all its stock, and the transfer of
 all the property occurs within the taxable year; in such case the
 adoption by the shareholders of the resolution under which is
 authorized the distribution of all the assets of such corporation
 in complete cancellation or redemption of all its stock shall be
 considered an adoption of a plan of liquidation, even though no
 time for the completion of the transfer of the property is
 specified in such resolution; or
 

Section 332(b)(2)

Assumptions: The respective shareholders of S1 and S2 adopt resolutions in year 1 for the complete liquidation of each company. Neither resolution explicitly or implicitly provides a time frame within which to complete the liquidation. S1 completely liquidates in year 1. S2 distributes some assets in liquidation in year 1 and distributes its remaining assets in year 2.

Treatment: The liquidating distribution of S1 to P is pursuant to §332 – the liquidating distributions all occur within the year in which they began. §332(b)(2). The liquidation of S2 does not meet this requirement and, therefore, is not pursuant to §332.

 
 
 (3) such distribution is one of a series of distributions by
 such other corporation in complete cancellation or redemption of
 all its stock in accordance with a plan of liquidation under
  which the transfer of all the property under the liquidation is
 to be completed within 3 years from the close of the taxable year
 during which is made the first of the series of distributions
 under the plan, except that if such transfer is not completed
 within such period, or if the taxpayer does not continue
 qualified under paragraph (1) until the completion of such
 transfer, no distribution under the plan shall be considered a
 distribution in complete liquidation.
 
 

Section 332(b)(3) Ex. 1

Assumptions: The shareholder resolution of S authorizing S’s liquidation, adopted in year 1, specified that the transfer of property in liquidation be completed no later than the end of year 3. Shortly after such adoption, S makes its first liquidating distribution.

Treatment: The liquidation qualifies under §332, and all distributions to P will be treated under §332. The liquidation satisfies the timeframe requirement of §332 because the shareholder resolution provided for all distributions to be completed within 3 years from the close of the year in which they began. §332(b)(3).

P must file a waiver on the statute of limitations with its return for each year which falls wholly or partly within the period of liquidation. P may also be required to file a bond. See, Reg. §§1.332-4(a)(2) & (3).

Section 332(b)(3) Ex.2

Assumptions: The shareholders’ resolutions for both S1 and S2 adopted in year1 provide that the liquidating distribution will be completed no later than the end of year 4. Shortly thereafter, S1 and S2 make their first liquidating distributions to P. P sells 30% of S to X in year 2.

Treatment: None of the distributions of either S1 or S2 qualify under §332 even though both shareholder resolutions provided the timeframe required by §332(b)(3). S1’s liquidating distribution in year 5 extended past the allowable timeframe while P did not continue the requisite (80%) ownership interest throughout the liquidating distribution. Accordingly, none of the distributions satisfy the timeframe requirements of §332(b)(3) even though two such distributions occurred in year 1.

 
 
 If such transfer of all the property does not occur within the
 taxable year, the Secretary may require of the taxpayer such bond,
 or waiver of the statute of limitations on assessment and
 collection, or both, as he may deem necessary to insure, if the
 transfer of the property is not completed within such 3-year
 period, or if the taxpayer does not continue qualified under
 paragraph (1) until the completion of such transfer, the assessment
 and collection of all income taxes then imposed by law for such
 taxable year or subsequent taxable years, to the extent
 attributable to property so received. A distribution otherwise
 constituting a distribution in complete liquidation within the
 meaning of this subsection shall not be considered as not
 constituting such a distribution merely because it does not
 constitute a distribution or liquidation within the meaning of the
 corporate law under which the distribution is made; and for
 purposes of this subsection a transfer of property of such other
 corporation to the taxpayer shall not be considered as not
 constituting a distribution (or one of a series of distributions)
 in complete cancellation or redemption of all the stock of such
 other corporation, merely because the carrying out of the plan
 involves (A) the transfer under the plan to the taxpayer by such
 other corporation of property, not attributable to shares owned by
 the taxpayer, on an exchange described in section 361, and (B) the
 complete cancellation or redemption under the plan, as a result of
 exchanges described in section 354, of the shares not owned by the
 taxpayer.
 
 

Section 332(b)

Adopted from Reg. §1.332-2(e).

Assumptions: The M preferred stock is limited and preferred as to dividends.

Treatment: O owns stock of M satisfying the stock ownership requirements of §1504(a)(2). O treats its receipt of all properties of M pursuant to the merger of M into O under state law as a liquidating distribution under §332. §332(b). Therefore, O recognizes no gain or loss. This treatment to O follows even though state law treats the transaction not as a distribution or liquidation but as a merger and even though §361 applies on O’s issuance of stock for the excess of assets received by O over O’s ratable share of M assets based on O’s ownership of M stock, and even though §354 applies to A.

 
 
 
 
 (c) Deductible liquidating distributions of regulated investment
  companies and real estate investment trusts
 If a corporation receives a distribution from a regulated
 investment company or a real estate investment trust which is
 considered under subsection (b) as being in complete liquidation of
 such company or trust, then, notwithstanding any other provision of
 this chapter, such corporation shall recognize and treat as a
 dividend from such company or trust an amount equal to the
 deduction for dividends paid allowable to such company or trust by
 reason of such distribution.
 (d) Recognition of Gain on Liquidation of Certain Holding 
 Companies.--
 (1) In general.--In the case of any distribution to a 
 foreign corporation in complete liquidation of an applicable 
 holding company--
 (A) subsection (a) and section 331 shall not apply 
 to such distribution, and
 (B) such distribution shall be treated as a 
 distribution of property to which section 301 applies.
 (2) Applicable holding company.--For purposes of this 
 subsection:
 (A) In general.--The term `applicable holding 
 company' means any domestic corporation--
 (i) which is a common parent of an 
 affiliated group,
 (ii) stock of which is directly owned by the 
 distributee foreign corporation,
 (iii) substantially all of the assets of 
 which consist of stock in other members of such 
 affiliated group, and
 (iv) which has not been in existence at all 
 times during the 5 years immediately preceding the 
 date of the liquidation.
 (B) Affiliated group.--For purposes of this 
 subsection, the term `affiliated group' has the meaning 
  given such term by section 1504(a) (without regard to 
 paragraphs (2) and (4) of section 1504(b)).
 (3) Coordination with subpart f.--If the distributee of a 
 distribution described in paragraph (1) is a controlled
 foreign corporation (as defined in section 957), then 
 notwithstanding paragraph (1) or subsection (a), such
 distribution shall be treated as a distribution to which 
 section 331 applies.
 (4) Regulations.--The Secretary shall provide such 
 regulations as appropriate to prevent the abuse of this 
 subsection, including regulations which provide, for the 
 purposes of clause (iv) of paragraph (2)(A), that a
 corporation is not in existence for any period unless it is
 engaged in the active conduct of a trade or business or owns a
 significant ownership interest in another corporation so 
 engaged.