Frequently Asked Questions
Who is eligible for the Nonrecognition of Gain on Subsidiary Liquidation?
The parent corporation must own at least 80% of the total voting power and value of the subsidiary's stock as defined in section 332(b).
How does the Nonrecognition of Gain on Subsidiary Liquidation work?
Prevents the recognition of gain or loss by a liquidating subsidiary corporation when it distributes property to its 80-percent parent corporation.
What law authorizes the Nonrecognition of Gain on Subsidiary Liquidation?
The Nonrecognition of Gain on Subsidiary Liquidation is authorized under IRC §337 of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §337
Source: Internal Revenue Code, Title 26, United States Code
§ 337. Nonrecognition for property distributed to parent in complete liquidation of subsidiary(a) In generalNo gain or loss shall be recognized to the liquidating corporation on the distribution to the 80-percent distributee of any property in a complete liquidation to which section 332 applies.
(b) Treatment of indebtedness of subsidiary, etc.(1) Indebtedness of subsidiary to parentIf—(A) a corporation is liquidated in a liquidation to which section 332 applies, and
(B) on the date of the adoption of the plan of liquidation, such corporation was indebted to the 80-percent distributee,
for purposes of this section and section 336, any transfer of property to the 80-percent distributee in satisfaction of such indebtedness shall be treated as a distribution to such distributee in such liquidation.
(2) Treatment of tax-exempt distributee(A) In generalExcept as provided in subparagraph (B), paragraph (1) and subsection (a) shall not apply where the 80-percent distributee is an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter.
(B) Exception where property will be used in unrelated business(i) In generalSubparagraph (A) shall not apply to any distribution of property to an organization described in section 511(a)(2) if, immediately after such distribution, such organization uses such property in an activity the income from which is subject to tax under section 511(a).
(ii) Later disposition or change in useIf any property to which clause (i) applied is disposed of by the organization acquiring such property, notwithstanding any other provision of law, any gain (not in excess of the amount not recognized by reason of clause (i)) shall be included in such organization’s unrelated business taxable income. For purposes of the preceding sentence, if such property ceases to be used in an activity referred to in clause (i), such organization shall be treated as having disposed of such property on the date of such cessation.
(c) 80-percent distributeeFor purposes of this section, the term “80-percent distributee” means only the corporation which meets the 80-percent stock ownership requirements specified in section 332(b). For purposes of this section, the determination of whether any corporation is an 80-percent distributee shall be made without regard to any consolidated return regulation.
(d) RegulationsThe Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of the amendments made by subtitle D of title VI of the Tax Reform Act of 1986, including—(1) regulations to ensure that such purposes may not be circumvented through the use of any provision of law or regulations (including the consolidated return regulations and part III of this subchapter) or through the use of a regulated investment company, real estate investment trust, or tax-exempt entity, and
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