Sec. 334. Basis of property received in liquidations
 
 (a) General rule
 If property is received in a distribution in complete
 liquidation, and if gain or loss is recognized on receipt of such
 property, then the basis of the property in the hands of the
 distributee shall be the fair market value of such property at the
 time of the distribution.
 

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 334(a) Ex.2, (b)(2)

Treatment: §332 applies to any liquidating distributions received by P but not by X. Only P is a corporation meeting the stock ownership requirements of §332. §337 provides no gain or loss recognition by S on the distribution to P. But, S does recognize gain on the distribution to X. §§336(a), (d)(3), 337(a).

While both P and X are corporations receiving liquidating distributions, only P is a “corporate distribute” for purposes of §334(b) because only P meets the stock ownership requirement of §332. §334(b)(2). As a result, P will receive a carryover basis of 160 in the S assets received (§334(b)(1)) while X will receive a FMV basis of 45 in the S assets received (§334(a)).

 
 
 (b) Liquidation of subsidiary
 (1) In general.--If property is received by a corporate 
 distributee in a distribution in a complete liquidation to which 
 section 332 applies (or in a transfer described in section 
 337(b)(1)), the basis of such property in the hands of such 
 distributee shall be the same as it would be in the hands of the 
 transferor; except that, in the hands of such distributee--
 (A) the basis of such property shall be the fair 
 market value of the property at the time of the 
 distribution in any case in which gain or loss is 
  recognized by the liquidating corporation with respect 
 to such property, and
 

Sections 334(b)(1)(A) Ex. 1, 367(e)(2)

Assumptions: F is a foreign corporation which will use the S assets in the conduct of a U.S. trade or business. S is a domestic corporation.

Treatment: While the liquidation is pursuant to §332 (§367(a) does not apply), §§337(a) and (b)(1) do not apply. §367(e)(2). Hence, S will recognize its realized gain of 100, and F will receive a FMV basis of 300 in the assets received. §334(b)(1)(A).

Sections 337(b)(2)(A) Ex. 1, 334(b)(1)(A)Ex. 2, 336(d)(3) Ex. 2

Assumptions: P is a §501 charitable organization exempt from tax which does not have unrelated business taxable income. One of the assets distributed by S to P has a built-in loss.

Treatment: P does not recognize its realized gain resulting from receiving the liquidating distribution from S. §332. S does, however, recognize its realized gains and losses from the liquidation. Even though P is an 80-percent distribute, §337(a) does not apply to S because P is exempt from tax. §337(b)(2)(A). The exception in §337(b)(2)(B)(i) does not apply because P does not have unrelated business taxable income. While §336(d)(3) generally precludes a subsidiary from recognizing losses in a liquidation to which §332 applies, this non-recognition does not apply where, as here, §§337(a) or (b)(1) does not apply. Because S recognizes gain in this §332 transaction, P will receive a FMV basis of 300 in the assets received. §334(b)(1)(A).

 
 
 
 (B) the basis of any property described in section 
 362(e)(1)(B) shall be the fair market value of the 
 property at the time of the distribution in any case in 
 which such distributee's aggregate adjusted basis of 
 such property would (but for this subparagraph) exceed 
 the fair market value of such property immediately after 
 such liquidation.
 
 

Section 334(b)(1)(B)

Assumptions: P is a U.S. corporation subject to tax in the U.S. F is a foreign corporation that would not be subject to U.S. tax if, hypothetically, it had disposed of its assets.

Treatment: F’s assets are described in §362(e)(1)(B) because F is not subject to U.S. tax with respect to such assets, but P is. Hence, but for §334(b)(1)(C), the built-in loss could be transferred from a person that could not use such loss (and presumably was not within the purview of U.S. tax when such loss was economically generated) to a person who could. Accordingly, §334(b)(1)(B) provides P with a FMV basis of 200 in those assets, not the normal carryover basis of 300.

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.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.

 
 
 (2) Corporate distributee. 
 For purposes of this subsection , the term “corporate distributee”
 means only the corporation which meets the stock ownership
 requirements specified in section 332(b). 
 
 

Sections 334(a) Ex.2, (b)(2)

Treatment: §332 applies to any liquidating distributions received by P but not by X. Only P is a corporation meeting the stock ownership requirements of §332. §337 provides no gain or loss recognition by S on the distribution to P. But, S does recognize gain on the distribution to X. §§336(a), (d)(3), 337(a).

While both P and X are corporations receiving liquidating distributions, only P is a “corporate distribute” for purposes of §334(b) because only P meets the stock ownership requirement of §332. §334(b)(2). As a result, P will receive a carryover basis of 160 in the S assets received (§334(b)(1)) while X will receive a FMV basis of 45 in the S assets received (§334(a)).