Chapter 6, Research Problem 6 – Although the requirements for a § 332 parent-subsidiary liquidation are fairly straightforward,

some planning and reporting issues must be addressed to ensure the proper outcome. Using the internet as your sole research
source, prepare an outline discussing the general requirements for a § 332 parent-subsidiary liquidation, including any
associated planning and reporting considerations.

Section 332 General Requirements

- Parent corporation must own 80% of stock ownership – 80% of both the total voting power of the corporation's stock
and 80% of the total value of the corporation's stock. There must also be some distribution with respect to the stock
of the subsidiary. If parent corporation fails the stock ownership test (less than 80%), parent corporation is not
qualified for Section 332
- All subsidiary company’s property must be distributed in complete cancelation of all its stock within the tax year or
within 3 years from the close of the tax year in which the first distribution occurred –
o The transfer of all the property occurs within the taxable year
 Adoption by the shareholders of the resolution under which is authorized the distribution of all the assets
of such corporation in complete cancellation or redemption of all its stock shall be considered an adoption
of a plan of liquidation, even though no time for the completion of the transfer of the property is specified
in such resolution; or (26 U.S. Code § 332 - Complete liquidations of subsidiaries)
o The transfer of all the property under the liquidation is to be completed within 3 years from the close of the
taxable year during which is made the first of the series of distributions under the plan
 If such transfer is not completed within such period, or if the taxpayer does not continue qualified until
the completion of such transfer, no distribution under the plan shall be considered a distribution in
complete liquidation (26 U.S. Code § 332 - Complete liquidations of subsidiaries)
o Subsidiary company must be solvent

(26 U.S. Code § 332 - Complete liquidations of subsidiaries)

Section 332 Planning

- Nonrecognition of gain or loss is limited to the receipt of property by a corporation that is the actual owner of stock (in
the liquidating corporation) meeting the requirements of section 1504(a)(2) –
o The recipient corporation must have been the owner of the specified amount of such stock on the date of the
adoption of the plan of liquidation and have continued so to be at all times until the receipt of the property
o If the recipient corporation does not continue qualified with respect to the ownership of stock of the liquidating
corporation and if the failure to continue qualified occurs at any time prior to the completion of the transfer of all
the property, the provisions for the nonrecognition of gain or loss do not apply to any distribution received under
the plan
- Section 332 applies only to those cases in which the recipient corporation receives at least partial payment for the stock
which it owns in the liquidating corporation. If section 332 is not applicable, see section 165(g) relative to allowance of
losses on worthless securities
- To constitute a distribution in complete liquidation within the meaning of section 332, the distribution must be:
o made by the liquidating corporation in complete cancellation or redemption of all of its stock in accordance with a
plan of liquidation, or
o one of a series of distributions in complete cancellation or redemption of all its stock in accordance with a plan of
liquidation
o Where there is more than one distribution, it is essential that a status of liquidation exist at the time the first
distribution is made under the plan and that such status continue until the liquidation is completed. Liquidation is
completed when the liquidating corporation and the receiver or trustees in liquidation are finally divested of all
the property (both tangible and intangible). A status of liquidation exists 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. A liquidation may be completed prior to the actual
dissolution of the liquidating corporation. However, legal dissolution of the corporation is not required. Nor will
the mere retention of a nominal amount of assets for the sole purpose of preserving the corporation's legal
existence disqualify the transaction. (See 26 CFR (1939) 39.22(a)-20 (Regulations 118).)
 - If a transaction constitutes a distribution in complete liquidation within the meaning of the Internal Revenue Code of
1954 and satisfies the requirements of section 332, it is not material that it is otherwise described under the local law
- If a liquidating corporation distributes all of its property in complete liquidation and if pursuant to the plan for such
complete liquidation a corporation owning the specified amount of stock in the liquidating corporation receives
property constituting amounts distributed in complete liquidation within the meaning of the Code and also receives
other property attributable to shares not owned by it, the transfer of the property to the recipient corporation shall not
be treated, by reason of the receipt of such other property, as not being a distribution (or one of a series of distributions)
in complete cancellation or redemption of all of the stock of the liquidating corporation within the meaning of section
332, even though for purposes of those provisions relating to corporate reorganizations the amount received by the
recipient corporation in excess of its ratable share is regarded as acquired upon the issuance of its stock or securities in a
tax-free exchange as described in section 361 and the cancellation or redemption of the stock not owned by the recipient
corporation is treated as occurring as a result of a taxfree exchange described in section 354
- Recognition of loss – Parent corporation need to reduce their stock ownership (below 80%) in the subsidiary
- A distribution otherwise constituting a distribution in complete liquidation within the meaning of this subsection shall
not be considered as not constituting such a distribution merely because it does not constitute a distribution or
liquidation within the meaning of the corporate law under which the distribution is made;  and for purposes of this
subsection a transfer of property of such other corporation to the taxpayer shall not be considered as not constituting a
distribution (or one of a series of distributions) in complete cancellation or redemption of all the stock of such other
corporation, merely because the carrying out of the plan involves:
o The transfer under the plan to the taxpayer by such other corporation of property, not attributable to shares
owned by the taxpayer, on an exchange described in section 361 , and
o The complete cancellation or redemption under the plan, as a result of exchanges described in section 354, of the
shares not owned by the taxpayer

(26 CFR § 1.332-2 - Requirements for nonrecognition of gain or loss)

Section 332 Reporting

- Statement by recipient corporation – Corporation receiving liquidating distribution must include a statement along with
their tax return for that tax year. The statement must include:
o the liquidating corporation's name and employer identification number;
o the date of distribution;
o effective generally for liquidations occurring before March 28, 2016, the aggregate fair market value and basis of
the liquidating corporation's assets that have been, or will be, transferred to the recipient corporation (a good
faith estimate of fair market value and basis is permitted); effective generally for liquidations occurring on or after
March 28, 2016, the fair market value and basis of the liquidating corporation's assets that have been, or will be,
transferred to the recipient corporation, aggregated as follows:
 importation property distributed in a loss importation transaction (this is a transaction subject to the anti-
loss importation rule of IRC §362(e)(1); see What Is the Limitation on Built-In Losses Imported or
Transferred in Tax-Free Transactions? for a discussion of this rule; in applying this rule to a subsidiary
liquidation, "section 322 liquidation" is substituted for "section 362 transaction");
 property with respect to which any gain or loss is recognized on the distribution; and
 property not described in (a) or (b), above.
o the date and control number of any private letter rulings issued by the IRS in connection with the liquidation; and
o a representation as to when the plan of liquidation was adopted and whether the liquidation was completed

(CCH AnswerConnect: Wolters Kluwer)

 References

26 U.S. Code § 332 - Complete liquidations of subsidiaries. (n.d.). Retrieved from

https://www.law.cornell.edu/uscode/text/26/332

26 CFR § 1.332-2 - Requirements for nonrecognition of gain or loss. (n.d.). Retrieved from
https://www.law.cornell.edu/cfr/text/26/1.332-2

CCH AnswerConnect: Wolters Kluwer. (n.d.). Retrieved from

https://answerconnect.cch.com/document/arp1001f8e1567c5610008d56d8d385ad169402a/federal/irc/explanation/what-
are-the-reporting-requirements-of-the-subsidiary-and-parent-corporation-in-a-section-332-subsidiary-liquidation