Question

A subsidiary corporation is liquidated under Sec 332. Pursuant to its liquidation, the subsidiary distributed property to a minority shareholder. With respect to this distribution, what are the tax consequences to the subsidiary corporation and to its minority shareholder?

Answer 1

In section 332 no gain or loss is recognized by a parent corporation on the receipt of property distributed in complete liquidation of a subsidiary but if the parent corporationis going to liquidation and it distributed property to its minority share holder order to qualify for Nonrecognition under Section 332, three requirements must be met

1.The first requirement that must be met is the 80 percent ownership requirement. The parent corporation (subsidary)must own at least 80 percent of the voting power or at least 80 percent of the total value of all the stock of the minority corporation(share holder) on the date of liquidation.

2.The second requirement to fallow is the subsidary corporation should completely writeoff its minority share holders shares or voting rights

3.The third requirement is with in how much time the distributios took place

No formal plan of liquidation needs to be put in place if all liquidating distributions are made within one taxable year of the minority shareholder

If the liquidating distributions extend beyond one taxable year, a formal plan of liquidation must be put in place and all liquidating distributions must be made within three taxable years of the close of the taxable year in which the first distribution is made.

If any one of the above condition is not satisfied the distributions on account of liquidation are taxed under section 331