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Transcript of Ch20 - 2015
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2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ebsite, in hole or in part.
Comprehensive Volume
1
Chapter 20
Corporations! "istributions in
Co#plete Li$uidation and an%vervie o& Reorgani'ations
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(he )ig *icture +slide 1 o& 2
- Mr. and Mrs. Albert #ithson have built asuccess&ul business, but they believe the ti#ehas co#e &or the# to thin/ seriously about
retire#ent.- (hey on all o& the stoc/ in %range, a
C corporation.
(heir stoc/ invest#ent has a basis o& 200,000.(he business, hich is in the 34 inco#e ta
brac/et, ons net assets that are orth 3 #illionand have a basis o& 1.5 #illion.
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(he )ig *icture +slide 2 o& 2
- 6n&ortunately, the #ithsons have no &a#ily#e#bers ho are interested in carrying on the
business, so they #ust resort to li$uidating %rangeCorporation. (heir strategy, in general, is to convert the value o& their
business into a diversi&ied port&olio o& #ar/etablesecurities and to live o&& the earnings.
- (he #ithsons reali'e that such a plan ill be
taable. (hey ould li/e to /no the a#ount that ill be availablea&ter paying all 7ederal taes.
- Read the chapter and &or#ulate your response.
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Li$uidations89n :eneral
- Corporation inds up a&&airs, pays debts, and
distributes re#aining assets to shareholders
*roduces sale or echange treat#ent to shareholder
Li$uidating corporation recogni'es gains and
losses upon distribution o& its assets, ith certain
eceptions
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Li$uidations8;&&ect on Corporation+slide 1 o&
- :ain or loss is recogni'ed by corporation on
distribution in co#plete li$uidation
Loss #ay be disalloed or li#ited i&!
- *roperty distributed to related parties- *roperty distributed has built
Result! Li$uidating distribution sub?ect to corporate level
ta +gain, and shareholder level ta +receipt o& proceeds
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Li$uidations8;&&ect on Corporation+slide 2 o&
- Li#itations on losses8Related *artyituationsLosses are disalloed on li$uidating distributions
to related parties i&!- "istribution is not pro rata
9n pro rata distributions, each shareholder receives their shareo& each asset
- *roperty distributed is dis$uali&ied property "is$uali&ied property is property ac$uired by corp in a @51transaction during the &ive
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Li$uidations8;&&ect on Corporation+slide o&
- Li#itations on losses8)uilt
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(he )ig *icture ;a#ple 3
Antistu&&ing Rules +slide 1 o& 2
- Return to the &acts o& (he )ig *icture on p. 20
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(he )ig *icture ;a#ple 3
Antistu&&ing Rules +slide 2 o& 2
- A sale or li$uidating distribution o& theproperty by %range Corp. ould result in a35,000 loss.
55,000 +&air #ar/et value o& property < 100,000+property basis.
- i#ilarly, a sale by the #ithsons o& the stoc/
ac$uired in the @ 51 echange ould alsoresult in a 35,000 loss.55,000 +&air #ar/et value o& stoc/ < 100,000
+stoc/ basis.
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"istribution o& Loss *roperty in
Li$uidation
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Li$uidations8;&&ect on hareholder+slide 1 o& 2
- :ain or loss recogni'ed on receipt o& property
&ro# li$uidating corporation
A#ount 7M> o& property received < basis in
stoc/
- :enerally, capital gain or loss
)asis in assets received in li$uidating distribution
7M> on date o& distribution
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Li$uidations8;&&ect on hareholder+slide 2 o& 2
pecial rule &or install#ent obligations
- hareholder #ay de&er gain recognition to point o&
collection
- Corporation #ust recogni'e all gain on distribution
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(he )ig *icture ;a#ple 1
(a *aid %n Bet :ain +slide 1 o& 2
- Return to the &acts o& (he )ig *icture on p. 20
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(he )ig *icture ;a#ple 1
(a *aid %n Bet :ain +slide 2 o& 2
- Assu#ing the #ithsons decide to
li$uidate the corporation and the taes the
corporation pays total D50,000.(he a#ount reali'ed by the #ithsons is
,150,000 +3,000,000 < D50,000.
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(he )ig *icture ;a#ple 13
(a *aid %n Bet :ain
- Return to the &acts o& (he )ig *icture on p. 20
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Li$uidations! *arent
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Li$uidations! *arent
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Li$uidations! *arent
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Li$uidations! *arent
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;lection 6nder @D+slide 1 o& 3
- *arent #ay elect to treat ac$uisition o& stoc/ in
ac$uired corp as a purchase o& the ac$uired
corp.=s assets i&!
;lection is #ade by &i&teenth day o& ninth #onth
&olloing $uali&ied stoc/ purchase
- Huali&ied stoc/ purchase occurs hen corp ac$uires
stoc/ representing at least D04 o& voting poer andvalue ithin a 12
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;lection 6nder @D+slide 2 o& 3
- (a Conse$uences
*arent corp has basis in subsidiary=s assets basis
in subsidiary=s stoc/
- ubsidiary #ay, but need not, be li$uidated
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;lection 6nder @D+slide o& 3
- (a Conse$uences +cont=d
ubsidiary is dee#ed to have sold its assets &or an
a#ount deter#ined ith re&erence to parent=s basis
in subsidiary=s stoc/, ad?usted &or liabilities o&subsidiary
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;lection 6nder @D+slide 3 o& 3
- (a Conse$uences +cont=d
:ain or loss is recogni'ed by subsidiary
ubsidiary is treated as a ne corporation that
purchased all o& its assets on the day a&ter the
$uali&ied stoc/ purchase date
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Reorgani'ations89n :eneral
- Re&ers to any corporate restructuring that #aybe ta
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u##ary o& "i&&erent (ypes
o& Reorgani'ations
- (he ter# reorgani'ation includes!
tatutory #erger or consolidation
toc/ &or stoc/ echange
toc/ &or assets echange
"ivisive echange
Recapitali'ation
Change in identity, &or#, or place o& organi'ation
(rans&ers in ban/ruptcy or receivership
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(a 7ree Reorgani'ation
Conse$uences, in :eneral +slide 1 o&
- Conse$uences to Ac$uiring Corporation
Bo gain or loss recogni'ed unless it trans&ers
property to the (arget corporation as part o& the
transaction- (hen gain, but not loss, #ay be recogni'ed
)asis o& property received retains basis it had in
hands o& (arget corp plus any gain recogni'ed bythe target
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(a 7ree Reorgani'ation
Conse$uences, in :eneral +slide 2 o&
- Conse$uences to (arget Corporation
Bo gain or loss unless it retains Jother propertyK
received in the echange or it distributes its on
property to shareholders- %ther property is de&ined as anything received other
than stoc/ or securities
(reated as boot
- :ain, but not loss, #ay be recogni'ed
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(a 7ree Reorgani'ation
Conse$uences, in :eneral +slide o&
- Conse$uences to (arget or Ac$uiring Co.hareholdersBo gain or loss unless shareholders receive cash or
other property in addition to stoc/- Cash or other property is considered boot
:ain recogni'ed by the stoc/holder is the lesser o& the bootreceived or the reali'ed gain
)asis o& shares received is sa#e as basis o& thosesurrendered, decreased by boot received, increasedby gain and dividend inco#e, i& any, recogni'ed inthe transaction
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Co#parison o& Reorgani'ation (ypes+slide 1 o& 5
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Co#parison o& Reorgani'ation (ypes+slide 2 o& 5
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Co#parison o& Reorgani'ation (ypes+slide o& 5
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Co#parison o& Reorgani'ation (ypes+slide 3 o& 5
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Co#parison o& Reorgani'ation (ypes+slide 5 o& 5
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Re&ocus %n (he )ig *icture +slide 1 o&
- (he #ithsons are ise to evaluate thea&&ordability o& their retire#ent planbe&ore they sell or li$uidate theirbusiness.
- Bonetheless, a&ter pay#ent o& inco#e taat both the corporate and shareholderlevels, they ill net only 2,5I0,000 &ro#the sale o& their 3 #illion business.
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Re&ocus %n (he )ig *icture +slide 2 o&
- peci&ically, in the event the corporation is
able to sell the business assets &or 3 #illion,
the reali'ed gain o& 2.5 #illion ill give rise
to 7ederal inco#e ta o& D50,000 +2,500,000 34.
- 7olloing the pay#ent o& the corporate
inco#e ta, the net proceeds to the #ithsonsill be ,150,000.
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Re&ocus %n (he )ig *icture +slide o&
- A&ter o&&setting the a#ount reali'ed &ro# theli$uidation by their stoc/ basis o& 200,000, theircapital gain o& 2,E50,000 ill be sub?ect to capitalgains ta o& 5E0,000+2,E50,000 204.
- (here&ore, the net a&ter
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Re&ocus %n (he )ig *icture +slide 3 o&
What If?
- 9nstead o& the co#plete li$uidation transaction
?ust described, the #ithsons should consider
alternatives that could produce a better ta
result such as the &olloing.
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Re&ocus %n (he )ig *icture +slide 5 o&
What If?
9& the #ithsons are able to &ind a buyer ho is interested
in #aintaining the business in the current corporate &or#,
they should try to sell their stoc/ in the business rather than
selling the business assets in li$uidation.
- 9& the buyer is illing to pay 3 #illion &or the corporation=s stoc/,
the #ithsons ould recogni'e a capital gain o& .D #illion and
have ,230,000 a&ter ta +3 #illion proceeds capital gains ta
o& I0,000. (his approach ould increase the net a&ter
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Re&ocus %n (he )ig *icture +slide I o&
What If?
- Another approach ould be to atte#pt to #ar/et thecorporation as a potential ta/eover target in a ta
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Re&ocus %n (he )ig *icture +slide o&
What If?
- An obvious advantage o& this approach is that gain
&ro# the disposition o& their stoc/ ould be de&erred
until the stoc/ in the ac$uiring corporation is sold in ataable transaction.
- Foever, a disadvantage the #ithsons ould need
to evaluate is that they ould not be able to build a
diversi&ied port&olio.
(heir invest#ent holdings ould largely, i& not co#pletely,
consist o& the stoc/ o& the ac$uiring corporation.
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If you have any comments or suggestions concerning this
PowerPoint Presentation for South-Western Federal
Taxation, please contact
!r" !onald #" Trippeer, $P%
[email protected]&'( )neonta