• info@kaizencpa.com
  • Our Office: USA - Hong Kong - Shenzhen - Shanghai - Beijing - Taiwan - Singapore - Japan - UK

+852 2341 1444(Hong Kong)
+86 755 8268 4483(Shenzhen)
+65 6438 0116(Singapore)

Search for anything.

Knowledge

  • Home
  • Knowledge
  • Introduction to U.S. Corporate Liquidation and Taxation

Introduction to U.S. Corporate Liquidation and Taxation

2023-05-22
  1. What is corporate liquidation?

    The regulations under Section 332 suggest that a liquidation has occurred when the corporation ceases to be a going concern and its activities are merely for the purpose of winding up its affairs, paying its debts, and distributing any remaining balance to its shareholders.

    If a corporation was not in existence throughout an annual accounting period (either calendar year or fiscal year), the corporation not only is required submit the deregistration documents at the Secretary of State's company registration office, but also is required file a final tax return for that fractional part of a year during which it was in existence.

  2. The Taxation of Liquidations

    Generally, for U.S. Federal income tax purposes, property exchanges are taxable events. In a section 331 liquidation, the amounts received by a shareholder in complete liquidation of a corporation are generally treated as full payment in exchange for the liquidating corporation’s stock. The shareholder will compare the value of the assets received in the liquidation to their stock basis in order to compute gain or loss.

    Unless a nonrecognition provision of Section 332 of the Code applies. Under Section 332, which provides that no gain or loss is recognized by a corporate shareholder on the receipt of property distributed by its 80%- owned corporate subsidiary in complete liquidation.

    Similarly, the liquidating corporation recognizes no gain or loss on its distribution to the 80% corporate shareholder of any property in a complete liquidation to which Section 332 applies.

    Example, P owns all of the stock of S and has a basis of $100 in its S stock. If P receives property worth $125 in a taxable liquidating distribution from S, P will have gain of $25.

    If S is liquidated in a transaction that qualifies under Section 332, P will have no gain in the transaction and it will take a carryover basis in the S assets it received.

  3. The Nontaxable Corporate Liquidation

    The Regulations promulgated thereunder Section 332, the liquidation of a corporate subsidiary into its parent must include the following essential components to qualify as a liquidation:
    (1) There must be the adoption of a plan of liquidation (the “Adoption of Plan Requirement”);
    (2) The corporate subsidiary must be solvent with respect to its common stock (the “Solvency Requirement”);
    (3) The parent corporation must own at least 80% of the corporate subsidiary’s stock within the meaning of Section 1504(a)(2) at the time the plan of liquidation is adopted and at all times thereafter until the liquidation is effective (the “80% Ownership Requirement”);
    (4) There must be a complete cancellation or redemption of all of the corporate subsidiary’s stock pursuant to the plan of liquidation (the “Elimination of Subsidiary Stock Requirement”);
    (5) The property distributions must be completed within the taxable year or in the case of a series of distributions, within three years from the close of the taxable year during which the first distribution is made (the “Timing Requirement”); and
    (6) There cannot be a reincorporation of the liquidated subsidiary’s assets pursuant to the same plan or arrangement (the “Liquidation-Reincorporation Limitation”).

  4. Deemed Liquidations

    Under Regs. §§ 301.7701-2 and 301.7701-3 the conversion of corporation to a limited liability company (“LLC”) can cause a liquidation for U.S. Federal income tax purposes.

    Under Reg. §301.7701-3(g)(1)(ii) if an eligible entity classified as a corporation validly elects to be classified as a partnership, the corporation is treated as distributing all of its assets and liabilities to its shareholders in liquidation of the corporation, and immediately thereafter, the shareholders are treated as transferring all of the distributed assets and liabilities to a newly formed partnership.

    Because of the tax fiction, the liquidation is merely a “deemed liquidation” for U.S. federal income tax purposes.

Reference:
https://www.irs.gov/businesses/understanding-your-form-1099-k
https://www.irs.gov/newsroom/irs-announces-delay-for-implementation-of-600-reporting-threshold-for-third-party-payment-platforms-forms-1099-k

Disclaimer

All information in this article is only for the purpose of information sharing, instead of professional suggestion. Kaizen will not assume any responsibility for loss or damage.

WhatsApp/Line/Wechat: +852 5616 4140

Related Posts

Who Needs to File U.S. Individual Income Tax Return?

Individual income tax is imposed on the worldwide-sourced income of U.S. citizens or residents, and on the domestic-sourced income of U.S. non-residents. According to the IRS, not everyone is obligated to file a tax return, such as in situations below the standard deduction. The following article will provide a brief overview of who is required to file a U.S. individual income tax return.

Introduction to U.S. HR Team Structures, Budgets & Compliance Audits

When each HR team is responsible for managing over 80 employees, optimizing departmental structure and budget management while reducing compliance risks has become crucial to organizational success. When HR architecture align with organizational complexity, budgetary capacity, and proactively mitigate audit liabilities, this function becomes indispensable.

How to Make a Job Offer of the U.S. Company (IV)

In addition to the job offer requirements and employee benefits outlined in the previous articles, companies often offer a number of other benefits that can be discussed with candidates before making an offer. This article will introduce some of the most common benefits companies may provide.

Risks of Carrying Out Work on a U.S. B Visa

The B visa is one of the most common visas for visitors to the United States. It comes in two categories: the B-1 visa, for short-term business visits, and the B-2 visa, for tourism or medical treatment. Travelers may also be issued a combination B-1/B-2 visa, valid for both purposes. Typically, a visitor may be admitted for up to six (6) months at a time, with the possibility of requesting an extension if necessary.