Question

Know the unique rules around Section 332 liquidations of 80% or more owned subsidiaries

Answer 1

Under Section 332, the parent corporation assumes the tax attributes of the subsidiary as well as its inside tax basis in its assets and its holding period for those assets.

To qualify under Section 332, the parent must own both 80% of 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 a liquidation does not qualify under Section 332, Section 331 will generally govern and gain or loss will be recognized

The IRS PLR clarifies that a deemed liquidation from the conversion of a corporate subsidiary to an LLC making a subsequent “check-the-box election” to be treated as a DE may qualify for non-recognition under Section 332 even though there was no actual distribution with respect to stock. Previous IRS regulations implied this transaction may qualify under Section 332, but the recent PLR makes the IRS’s position unambiguous.

The PLR also confirmed all the components of Section 332 apply to the transaction, not just non-recognition of gain or loss. This includes the parent corporation assuming the subsidiary’s tax basis and holding period of its assets, as well as the subsidiary’s tax attributes including any net operating loss carryovers, capital loss carryovers, and earnings and profits among others.