Tax Planning for Corporate Liquidation
Tax planning for corporate liquidation
The Tax reform act of 1986(TRA) made significant changes to tax provisions which had influence on corporations. One of the most important changes was the deletion of the General Utilities doctrine; under a plan of complete liquidation it had given a tax relief for appreciated assets distribution. This essay illustrates tax law changes about corporate liquidations and suggests some tax planning strategies to mitigate the influence of TRA.
Sec. 336 changes
Before the TRA law, corporate liquidation distributions produced no taxable gain or loss unless certain rules and exceptions applied under old Sec. 336.
Revised Sec. 336 involves five parts changes: 1. Under a plan of complete liquidation, the recognition of gains and certain losses for asset distributions is required under new Sec. 336(a). 2. The loss-recognition is denied for a liquidating corporation distributing properties acquired under Sec. 351 or 118 within five years to related parties under new Sec. 336(d). 3. The loss-recognition is denied for a liquidating corporation distributing economically depreciated assets to related parties on a non-pro rate basis under new Sec. 336(d). 4. Reduction of the adjusted basis of assets producing recognized losses for the build-in capital loss at the time of contribution under new Sec. 336(d). 5. Under new Sec. 336(b), if the debt assumed by the shareholder exceeds the FMV of the property the substitution of the amount of debt for the fair market value of assets is required.
There are three methods that can be adopted to decrease the affect of the Sec. 336 changes : 1. Distribute tainted property that were acquired under Sec. 351 or 118 within two and five years to the unrelated parties. 2. Distribute the un-tainted economically depreciated properties to the related parties on a pro rate basis. 3. Distribute available cash between the related and unrelated parties to achieve the distribution formula.
The Tax reform act of 1986(TRA) made significant changes to tax provisions which had influence on corporations. One of the most important changes was the deletion of the General Utilities doctrine; under a plan of complete liquidation it had given a tax relief for appreciated assets distribution. This essay illustrates tax law changes about corporate liquidations and suggests some tax planning strategies to mitigate the influence of TRA.
Sec. 336 changes
Before the TRA law, corporate liquidation distributions produced no taxable gain or loss unless certain rules and exceptions applied under old Sec. 336.
Revised Sec. 336 involves five parts changes: 1. Under a plan of complete liquidation, the recognition of gains and certain losses for asset distributions is required under new Sec. 336(a). 2. The loss-recognition is denied for a liquidating corporation distributing properties acquired under Sec. 351 or 118 within five years to related parties under new Sec. 336(d). 3. The loss-recognition is denied for a liquidating corporation distributing economically depreciated assets to related parties on a non-pro rate basis under new Sec. 336(d). 4. Reduction of the adjusted basis of assets producing recognized losses for the build-in capital loss at the time of contribution under new Sec. 336(d). 5. Under new Sec. 336(b), if the debt assumed by the shareholder exceeds the FMV of the property the substitution of the amount of debt for the fair market value of assets is required.
There are three methods that can be adopted to decrease the affect of the Sec. 336 changes : 1. Distribute tainted property that were acquired under Sec. 351 or 118 within two and five years to the unrelated parties. 2. Distribute the un-tainted economically depreciated properties to the related parties on a pro rate basis. 3. Distribute available cash between the related and unrelated parties to achieve the distribution formula.