Sec. 337. Nonrecognition for property distributed to parent in
 complete liquidation of subsidiary
 
 (a) In general
 No gain or loss shall be recognized to the liquidating
 corporation on the distribution to the 80-percent distributee of
 any property in a complete liquidation to which section 332
 applies.
 

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 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 indebtedness of subsidiary, etc.
 (1) Indebtedness of subsidiary to parent
 If -
 (A) a corporation is liquidated in a liquidation to which
 section 332 applies, and
 (B) on the date of the adoption of the plan of liquidation,
 such corporation was indebted to the 80-percent distributee,
 for purposes of this section and section 336, any transfer of
 property to the 80-percent distributee in satisfaction of such
 indebtedness shall be treated as a distribution to such
 distributee in such liquidation.
 
 

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) Treatment of tax-exempt distributee
 (A) In general
 Except as provided in subparagraph (B), paragraph (1) and
 subsection (a) shall not apply where the 80-percent distributee
 is an organization (other than a cooperative described in
 section 521) which is exempt from the tax imposed by this
 chapter.
 

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).

Section 337(b)(2)(A) Ex. 2

Assumptions: P is a §521 tax-exempt farmers’ cooperative.

Treatment: P does not recognize its realized gain resulting from receiving the liquidating distribution from S. §332. Furthermore, S does not recognize its realized gains or losses from the liquidation. §337(a) generally provides that a subsidiary does not recognize gains or losses in a distribution to an 80-percent distribute (P is an 80-percent distribute) in a §332 liquidation. But, §337(b)(2)(A) generally provides that §337(a) (as well as §337(b)(1)) does not apply if the 80-perecent distribute is a tax-exempt organization. That exception does not apply, however, where the parent, tax-exempt organization, is a §521 farmers’ cooperative, as is true here.

 
 
 
 
 
 (B) Exception where property will be used in unrelated business
  (i) In general
 Subparagraph (A) shall not apply to any distribution of
 property to an organization described in section 511(a)(2)
 if, immediately after such distribution, such organization
 uses such property in an activity the income from which is
 subject to tax under section 511(a).
 (ii) Later disposition or change in use
 If any property to which clause (i) applied is disposed of
 by the organization acquiring such property, notwithstanding
 any other provision of law, any gain (not in excess of the
 amount not recognized by reason of clause (i)) shall be
 included in such organization's unrelated business taxable
 income. For purposes of the preceding sentence, if such
 property ceases to be used in an activity referred to in
 clause (i), such organization shall be treated as having
 disposed of such property on the date of such cessation.
 

Section 337(b)(2)(B)

Assumptions: P is a §501(c) charitable organization exempt from tax which has an unrelated business subject to tax. Assets 1 through 5 are distributed by S to P in liquidation. Asset 1 has a built-in gain and will be used by P for its charitable purpose. Asset 2 has a built-in gain and will always be used in P’s unrelated business. Asset 3 has a built-in of 30 at liquidation, is originally used in P’s unrelated business, and is sold to a third party at a gain of 40. Asset 4 has a built-in loss at liquidation of 20, is originally used in P’s unrelated business and is sold to a third party at a loss of 20. Asset 5 has a built-in gain of 35 at liquidation, is originally used in P’s unrelated business, but, at a time when the built-in gain equals 30, P begins using the asset in P’s exempt function.

Treatment: P does not recognize its realized gain resulting from the liquidation. §332. Pursuant to §337(a), S would not generally recognize gains or losses from the liquidating distributions. Pursuant to §337(b)(2)(A), however, a liquidating subsidiary would generally recognize gains or losses where, as here, the 80-percent distribute is exempt from tax. §337(b)(2)(B) provides exceptions to §337(b)(2)(A). The following results:

Asset 1: because the asset was never used in P’s unrelated business, §337(b)(2)(B) does not apply and S recognizes the built-in gain at the time of liquidation.

Asset 2: because the asset is always used in P’s unrelated business, §337(b)(2)(B)(i) applies, and the built-in gain at liquidation is never recognized by any party.

Asset 3: §337(b)(2)(B)(ii) applies on the later sale. Accordingly, S never recognizes its built-in gain of 30. Upon the later sale by P, P includes gain of 30 (amount is limited to the gain built-in at liquidation) in P’s UBTI.

Asset 4: §337(b)(2)(B)(ii) requires inclusion of only gains in UBTI, so the loss is never included in calculating any party’s income.

Asset 5: pursuant to §337(b)(2)(B)(ii), P’s conversion of the asset away from the unrelated business is treated like a sale and so the 30 gain built-in at conversion is included in P’s UBTI.

 
 
 (c) 80-percent distributee
 For purposes of this section, the term ''80-percent distributee''
 means only the corporation which meets the 80-percent stock
 ownership requirements specified in section 332(b). For purposes of
 this section, the determination of whether any corporation is an
 80-percent distributee shall be made without regard to any
 consolidated return regulation.
 

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.

Section 337(c) Ex.2

Assumption: P, N1 and N2 file a consolidated tax return.

Treatment: The second sentence of §337(c) is designed to defeat “mirror transactions”, which this example could be part of. While §332 generally requires one corporation to directly own 80% of another corporation, reg. §1.1502-34 allows members of a consolidated group to aggregate stock ownership in determining 80% test. §332 therefore applies to N1 and N2 (but there is no realized gain or loss to not recognize). When those members have aggregate 80% ownership, they would each be considered 80-perecnt distributes but for the second sentence of §337(c). §337(c)’s second sentence proscribes using this consolidated regulation for purposes of determining any 80-percent distributee. As a result, neither N1 nor N2 are 80-percent distributees and therefore, S does not distribute to any 80-percent distribute and S recognizes its realized gains of 45. This does not alter the application of §332 to N1 and N2.

 
 
 (d) Regulations
 The Secretary shall prescribe such regulations as may be
 necessary or appropriate to carry out the purposes of the
 amendments made by subtitle D of title VI of the Tax Reform Act of
 1986, including -
 (1) regulations to ensure that such purposes may not be
 circumvented through the use of any provision of law or
 regulations (including the consolidated return regulations and
 part III of this subchapter) or through the use of a regulated
 investment company, real estate investment trust, or tax-exempt
 entity, and
 (2) regulations providing for appropriate coordination of the
 provisions of this section with the provisions of this title
 relating to taxation of foreign corporations and their
 shareholders.