What is a section 332 liquidation?
332 provides tax-free treatment to the corporate shareholder’s gain or loss from the receipt of the subsidiary’s property in liquidation, and Sec. 1504(a)(2) (generally 80% by voting power and value) and the distribution was made in complete cancellation or redemption of all the stock of the liquidating corporation.
What are the tax effects of the complete liquidation of a subsidiary corporation?
The tax consequences of liquidating a C corporation holding appreciated assets can be adverse. With maximum federal corporate rates of 35%, maximum individual rates on long-term capital gains of 20%, and the net investment income tax rate of 3.8%, the combined federal tax burden can approach 60% of taxable income.
What is liquidation and being insolvent?
Liquidation in finance and economics is the process of bringing a business to an end and distributing its assets to claimants. It is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations when they are due.
Is a liquidating distribution subject to withholding tax?
43 The U.S. corporation could use a portion of the sales proceeds to repay debt, then adopt a plan of liquidation and distribute the remaining proceeds to its nonresident alien individual shareholder as a liquidating distribution, which can be paid free of any U.S. withholding tax.
What is difference between liquidation and dissolution?
Simply put, a dissolution is a (typically) voluntary legal closure of a business while a liquidation involves the selling of a company’s assets in order to pay creditors.
What is a liquidating transaction?
Related Definitions Liquidating Transaction means any sale or other disposition of all or substantially all of the assets of the Company or a related series of transactions that, taken together, results in the sale or other disposition of all or substantially all of the assets of the Company.
What is the difference between Section 331 and 332?
Generally, two Internal Revenue Code (IRC) sections govern corporate liquidations: Section 331, which requires gain or loss to be recognized; and Section 332, which does not result in recognition of gain or loss.
What happens to stock basis in a 332 liquidation?
In a section 332 transaction, the parent’s basis in its subsidiary’s stock is eliminated without gain or loss; however, the parent also succeeds to the subsidiary’s tax attributes under section 381, including its net operating losses.
What does financially insolvent mean?
Generally speaking, insolvency refers to situations where a debtor cannot pay the debts she owes. For instance, a troubled company may become insolvent when it is unable to repay its creditors money owed on time, often leading to a bankruptcy filing.
How do I report a liquidating distribution on my taxes?
Answer. Liquidating distributions (cash or noncash) are a form of a return of capital. Any liquidating distribution you receive is not taxable to you until you recover the basis of your stock. After the basis of your stock is reduced to zero, you must report the liquidating distribution as a capital gain.
How is a liquidating distribution treated for tax purposes?
Proceeds from a cash liquidation distribution can be either a non-taxable return of principal or a taxable distribution, depending upon whether or not the amount is more than the investors’ cost basis in the stock. Payments in excess of the total investment are capital gains, subject to capital gains tax.