Sec

Sec. 336. Gain or loss recognized on property distributed in

        complete liquidation

    (a) General rule

      Except as otherwise provided in this section or section 337, gain

    or loss shall be recognized to a liquidating corporation on the

    distribution of property in complete liquidation as if such

    property were sold to the distributee at its fair market value.

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 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 336(a) Ex. 3, (d)(3) Ex.1, 337(a) Ex. 3

Treatment: §332 applies to the distribution to P. Accordingly, P does not recognize gain. §337(a) provides that S does not recognize gain on its distribution to P, the 80-percent distributee. S will recognize its gain of 5 on its distribution to A – the §337(a) non-recognition rule only applies to distributions to 80-percent distributes. §§336(a), 337(a). S will not, however, recognize losses on distributions, including those to non 80-percent distributes. §336(d)(3). Accordingly, S does not recognize its loss of 10 on the distribution to B.

    (b) Treatment of liabilities

      If any property distributed in the liquidation is subject to a

    liability or the shareholder assumes a liability of the liquidating

    corporation in connection with the distribution, for purposes of

    subsection (a) and section 337, the fair market value of such

    property shall be treated as not less than the amount of such

    liability.

Section 336(b) Ex. 1

Treatment: While §336(a) would treat X as having a gain of 20 (FMV of 100 less AB of 80), the FMV for purposes of measuring X’s gain or loss on each asset is deemed to be not less than the liabilities on such asset. Accordingly, X will have a gain of 10 on asset 1 (50 – 40) and 20 on asset 2 (60 – 40) because the liabilities of 60 on that asset exceed the assets FMV. Apparently, this adjustment does not impact A’s amount realized (100 – 60 = 40) by increasing the value of asset 2 to 60, or A’s gain (40 – 25 = 15).

Section 336(b) Ex. 2

Assumptions: P is a §501 charitable organization exempt frpm tax which does not have unrelated business taxable income.

Treatment: P does not recognize the realized gain resulting from receiving the liquidating distribution from S. §332. S does, however, recognize its realized gain from the liquidation. §337(b)(2)(A). The exception in §337(b)(2)(B)(i) does not apply because P does not have unrelated business taxable income. When P computes its gain, the FMV of each asset is deemed to be not less than the liabilities on such asset pursuant to §336(b) which applies both for purposes of §336(a) and §337. Accordingly, X will have a gain of 10 on asset 1 (50 – 40) and 20 on asset 2 (60 – 40) because the liabilities of 60 on that asset exceed the asset’s FMV. P will receive a FMV basis in the assets received. §334(b)(1)(A). Whether the FMV of asset 2 is deemed to be 60 is unclear.

    (c) Exception for liquidations which are part of a reorganization

          For provision providing that this subpart does not apply to

        distributions in pursuance of a plan of reorganization, see

        section 361(c)(4).

Sections 336(c), 361(c)(4)

Assumption: A plan of reorganization exists.

Treatment: The transaction is a C reorganization. §368(1)(1)(C). Even though T liquidates pursuant to the transaction, the liquidation provisions (e.g., §336) do not apply and the distribution provisions (e.g., §311) likewise do not apply to T. §§336, 361(c)(4). Instead, T’s tax treatment will be governed by §361 which will provide that T does not recognize gain or loss.

    (d) Limitations on recognition of loss

      (1) No loss recognized in certain distributions to related

          persons

        (A) In general

          No loss shall be recognized to a liquidating corporation on

        the distribution of any property to a related person (within

        the meaning of section 267) if -

            (i) such distribution is not pro rata, or

Section 336(d)(1)(A)(i)

Treatment: A liquidating corporation generally recognizes both gains and losses when it distributes its assets. So, X recognizes its gain on the liquidating distribution of parcel 2 to B. §336(a). But, X cannot recognize its loss on the liquidating distribution of parcel 1 to A because A is a related person (§267(b)(2)) and the distribution of parcel 1 is not pro-rata. §336(d)(1)(A))(i).

            (ii) such property is disqualified property.

Sections 336(d)(1)(A)(ii) Ex. 1 & (d)(1)(B) Ex. 1

Assumptions: A and C are married to each other. A was the sole shareholder (owning 20 shares) in Year 1 (which was prior to the enactment of §362(e)(2)) when A contributed asset 1 with AB of 70 and FMV of 90. In year 3, C became a shareholder of X by transferring asset 2 in exchange for 30 shares of X. At that same time, A contributed cash for 20 more shares. When X liquidates in Year 4, it distributes all assets including 1 and 2. At liquidation asset 1 has AB of 70 and FMV of 40 (i.e., no change) while asset 2 has AB of 80 and FMV of 70. A, C and X are all related parties. §267(b).

Treatment: While a liquidating corporation generally recognizes both gains and losses from liquidating distributions (§336(a)), X does not recognize its realized losses of 30 and 10 on assets 1 and 2, respectively. §336(d)(1)(A)(ii). This is because both assets are disqualified property distributed to related parties – X acquired asset 1 as a contribution to capital and asset 2 in a §351 transaction. This treatment applies to asset 2 even though at contribution the asset’s FMV exceeds its AB and therefore the perceived abuses do not appear to exist.

Sections 336(d)(1)(A)(ii) Ex. 2 & (d)(1)(B) Ex. 2

Assumptions: When X liquidates, it distributes parcels 1 and 3 with FMVs of 50 and 100, respectively. The exchange with the third party qualifies as a like-kind exchange. The incorporation exchange occurred in Year 1, the like-kind exchange in Year 2 and the liquidation in Year 3.

Treatment: A and X are related parties. §267(b)(2). X recognizes the realized gain of 30 on the distribution of parcel 2 to A. X does not recognize its realized loss of 30 on the distribution of parcel 3 to related party A. §336(d)(1)(A)(ii). While parcel 3 was not acquired by X as a contribution to capital or in a §351 transaction, parcel 3’s basis was determined by reference to parcel 2’s AB which was acquired by X in a §351 transaction and parcel 3 is, therefore, also “disqualified property”. §§1031 & 336(d)(1)(B).

        (B) Disqualified property

          For purposes of subparagraph (A), the term ''disqualified

        property'' means any property which is acquired by the

        liquidating corporation in a transaction to which section 351

        applied, or as a contribution to capital, during the 5-year

        period ending on the date of the distribution.  Such term

        includes any property if the adjusted basis of such property is

        determined (in whole or in part) by reference to the adjusted

        basis of property described in the preceding sentence.

Sections 336(d)(1)(A)(ii) Ex. 1 & (d)(1)(B) Ex. 1

Sections 336(d)(1)(A)(ii) Ex. 2 & (d)(1)(B) Ex. 2

      (2) Special rule for certain property acquired in certain

          carryover basis transactions

        (A) In general

          For purposes of determining the amount of loss recognized by

        any liquidating corporation on any sale, exchange, or

        distribution of property described in subparagraph (B), the

        adjusted basis of such property shall be reduced (but not below

        zero) by the excess (if any) of -

            (i) the adjusted basis of such property immediately after

          its acquisition by such corporation, over

            (ii) the fair market value of such property as of such

          time.

        (B) Description of property

          (i) In general

            For purposes of subparagraph (A), property is described in

          this subparagraph if -

              (I) such property is acquired by the liquidating

            corporation in a transaction to which section 351 applied

            or as a contribution to capital, and

              (II) the acquisition of such property by the liquidating

            corporation was part of a plan a principal purpose of which

            was to recognize loss by the liquidating corporation with

            respect to such property in connection with the

            liquidation.

         Other property shall be treated as so described if the

          adjusted basis of such other property is determined (in whole

          or in part) by reference to the adjusted basis of property

          described in the preceding sentence.

Section 336(d)(2)(B)(i)

Assumptions: Before any transaction indicated, A, B and C (otherwise unrelated to each other) owned 45%, 10% and 45%, respectively, of X and X had assets AB 100, FMV 200. In Year 1, A transfers parcel 1 while B and C transfer cash to X, all as contributions to X’s capital. They made these contributions in the hopes of limiting corporate gain on liquidation. 9 months late, X exchanges parcel 1 for parcel 2 in a like-kind exchange with a third party. X liquidates in Year 2, distributing all of its assets, including parcel 2 with a FMV of 45.

Treatment: Pursuant to §1031(d), and but for §336(d)(2), X would have a basis of 100 in parcel 2. While parcel 2 was not acquired in a contribution to capital as part of a plan a principal purpose of which was to recognize loss on such property to offset gains so acquired, parcel 1 was so acquired, and parcel 2 has a basis determined by reference to parcel 1. Accordingly, for purposes of determining loss, parcel 2 will have AB of 45 (100 less 55, the built-in loss of parcel 1 at the time of its contribution) and X therefore does not recognize loss (nor gain) on the liquidating distribution of parcel 2 ( Amount realized of 45 – AB of 45 = 0 gain or loss). §336(d)(2).

          (ii) Certain acquisitions treated as part of plan

            For purposes of clause (i), any property described in

          clause (i)(I) acquired by the liquidated corporation after

          the date 2 years before the date of the adoption of the plan

          of complete liquidation shall, except as provided in

          regulations, be treated as acquired as part of a plan

          described in clause (i)(II).

Section 336(d)(2)(B)(ii)

Assumptions: A’s contribution of asset 1 was more than 2 years prior to adoption of a plan (explicit or implicit) to liquidate X. A’s contribution of assets 2 and 3 occurred 18 months prior to the adoption of the plan to liquidate. Asset 2 has a clear and substantial relationship to X’s business. Asset 3 does not. The sale of these assets, at their unchanged FMVs, occurs 8 months prior to liquidation.

Treatment: While regulations have not yet been promulgated, legislative history suggests that the loss from asset 1 will not be limited by §336(d)(2) except in the, “most rare and unusual cases”. The loss from asset 2 would likewise not be limited because that asset has a clear and substantial relationship to X’s current or future business. The loss from asset 3 would be limited (in this case the entire loss is disallowed) because a presumption of stuffing exists when an asset is contributed within 2 years of adoption of a plan of liquidation and this presumption is not overcome by a clear and substantial relationship between the asset and X’s current or future business.

        (C) Recapture in lieu of disallowance

          The Secretary may prescribe regulations under which, in lieu

        of disallowing a loss under subparagraph (A) for a prior

        taxable year, the gross income of the liquidating corporation

        for the taxable year in which the plan of complete liquidation

        is adopted shall be increased by the amount of the disallowed

        loss.

Section 336(d)(2)(C)

Assumptions: A contributed asset 1 to X’s capital in the year prior to adoption of the plan to liquidate X. Six months later in that same year of contribution, X sells the assets to a third party. X liquidates the following year.

Treatment: The loss from asset 1 is presumptively limited to 0 by §336(d)(2). This loss is generally disallowed in the year of sale, which is the year prior to liquidation. §336(d)(2)(C) allows the IRS to promulgate regulations that would allow the loss of 80 in the year of sale, but then increase X’s income by 80 in the following year when the plan to liquidate is adopted.

Section 336(d)(2)

Assumptions: Before any transaction indicated, A, B and C (otherwise unrelated to each other) owned 45%, 10% and 45%, respectively, of X Corp. and X had assets with AB 100, FMV 200. In Year 1, A, B and C transfer parcel 1, cash and parcel 2, respectively, to X as contribution to the capital of X. They did so anticipating a liquidation and in the hopes of limiting corporate gain on liquidation. 3 months later X sold parcel 1 for 35. In Year 2, X liquidates, distributing parcel 2 to A while also distributing its other remaining assets.

Treatment: Because A, B and C are not related, they are also not considered related to X Corp. under §267. Accordingly, §336(d)(1) does not apply. §336(d)(2) does, however, apply to parcels 1 and 2,because these assets were acquired as part of a plan a principal purpose of which was to offset gains in the liquidation. This is true for parcel 1 because the loss they hoped to generate would have been carried over to offset the liquidation gain as well as parcel 2 where the hoped-for loss would have been generated in the liquidation itself. Because §336(d)(2) applies, the basis of each asset for purposes of determining loss is reduced by the loss built-in at the time of contribution. For parcel 1, this loss basis would be 45 (actual basis of 50 less the built-in loss of 5). Accordingly, X would recognize a loss of only 10 from parcel 1. For parcel 2, the loss basis would also be 45 (actual basis of 100 less built-in loss of 55). Because the asset has a value of 60 at the time of liquidation, which is in between its loss basis of 45 and its gain basis of 100, X recognizes neither gain or loss on the liquidating distribution of this asset.

      (3) Special rule in case of liquidation to which section 332

          applies

        In the case of any liquidation to which section 332 applies, no

      loss shall be recognized to the liquidating corporation on any

      distribution in such liquidation.  The preceding sentence shall

      apply to any distribution to the 80-percent distributee only if

      subsection (a) or (b)(1) of section 337 applies to such

      distribution.

Sections 336(a) Ex. 3, (d)(3) Ex.1, 337(a) Ex. 3

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).

    (e) Certain stock sales and distributions may be treated as asset

        transfers

      Under regulations prescribed by the Secretary, if -

        (1) a corporation owns stock in another corporation meeting the

      requirements of section 1504(a)(2), and

        (2) such corporation sells, exchanges, or distributes all of

      such stock,

    an election may be made to treat such sale, exchange, or

    distribution as a disposition of all of the assets of such other

    corporation, and no gain or loss shall be recognized on the sale,

    exchange, or distribution of such stock.

Section 336(e)

Treatment: P generally has a gain of 125 on the sale of its S stock. §336(e) grants regulatory authority for an election to treat the stock sale as, instead, a sale of S’s assets. Some 20 years later these regulations have yet to be promulgated or proposed..