20.8 Corporate Liquidation
Key Takeaways
- Complete liquidation under §331/§336 generally results in double taxation.
- Corporation recognizes gain/loss on asset distributions at FMV under §336 (subject to §336(d) related-party loss limits).
- Shareholders recognize capital gain/loss on stock surrender under §331 (FMV received minus stock basis).
- Parent-subsidiary liquidation under §332 is tax-free when parent owns 80%+ of voting power AND 80%+ of value.
- Under §337, the liquidating subsidiary recognizes no gain or loss on distributions to its 80%+ parent.
- Under §334(b), the parent takes a carryover basis from the subsidiary in the §332 liquidation.
- Corporate tax rate on liquidation gain is the permanent 21%; shareholder tax on liquidating capital gain is 0/15/20%.
Why This Matters for the Exam
Liquidation is the final chapter for a C corporation — and it triggers double taxation (with the §332 parent-subsidiary exception). The exam tests the general rules and the parent-subsidiary exception. OBBBA does not change the §331/§336/§332/§337/§334 framework; it only locks in the 21% corporate rate that applies to §336 gain.
Expect at least 3-4 questions on liquidation.
What Is a Complete Liquidation?
A complete liquidation occurs when a corporation:
| Step | Action |
|---|---|
| 1 | Ceases business operations |
| 2 | Distributes all assets to shareholders |
| 3 | Cancels all stock |
| 4 | Dissolves the entity under state law |
Double Taxation on Liquidation
| Level | Tax |
|---|---|
| Corporate level (§336) | Gain/loss on asset distribution at FMV (21% rate, permanent) |
| Shareholder level (§331) | Capital gain/loss on stock surrender (0/15/20%) |
Corporate-Level Tax (§336)
The corporation recognizes gain or loss as if it sold all assets at FMV:
| Rule | Treatment |
|---|---|
| Gain | Recognized (taxed at 21%) |
| Loss | Generally recognized |
| Related-party losses (§336(d)(1)) | Disallowed on distributions to >50% shareholders if either (a) not pro rata or (b) the asset was contributed within 5 years with a tax-avoidance purpose (disqualified property) |
| Built-in loss on contributed property | §336(d)(2) limits losses on property contributed within 2 years to avoid duplication of basis |
§336 Example (TY 2025)
| Item | Amount |
|---|---|
| Asset basis | $100,000 |
| Asset FMV | $180,000 |
| Corporate gain | $80,000 |
| Tax (21%) | $16,800 |
Shareholder-Level Tax (§331)
Shareholders recognize capital gain or loss:
| Formula | Calculation |
|---|---|
| Amount received (FMV after corporate tax) | $X |
| - Stock basis | -$Y |
| = Capital gain/loss |
Liquidating distributions are treated as full payment in exchange for stock, not as dividends. Multiple distributions in a series may be combined; basis is recovered first.
§331 Example (TY 2025)
| Item | Amount |
|---|---|
| Asset FMV received | $180,000 |
| After corporate tax | $163,200 |
| Shareholder's stock basis | $50,000 |
| Capital gain | $113,200 |
| Tax (20% rate, top bracket) | $22,640 |
Combined Tax Burden
| Level | Tax |
|---|---|
| Corporate | $16,800 |
| Shareholder | $22,640 |
| Total | $39,440 |
| Effective rate on $80,000 economic gain | 49.3% |
Parent-Subsidiary Liquidation (§332)
Exception: If a parent owns 80%+ of subsidiary, the liquidation is tax-free to both entities.
| Requirement | Detail |
|---|---|
| Ownership | Parent owns 80%+ of voting power AND 80%+ of value of all classes of stock |
| Complete liquidation | All subsidiary assets distributed |
| Timing | Within one tax year, or per a plan of liquidation adopted with distributions completed within 3 tax years after adoption |
§332 Treatment Summary
| Level | Treatment |
|---|---|
| Subsidiary (§337) | No gain/loss recognized on distributions to 80%+ parent |
| Parent (§332) | No gain/loss recognized on receipt |
| Basis (§334(b)) | Parent takes carryover basis in subsidiary's assets |
| Minority shareholders | Treated under §331 (taxable) — only the 80%+ parent qualifies for §332 |
§332 Example
| Item | Treatment |
|---|---|
| Parent owns 100% of Sub | Qualifies for §332 |
| Sub's asset basis | $200,000 |
| Sub's asset FMV | $500,000 |
| Sub's gain (§337) | $0 |
| Parent's gain (§332) | $0 |
| Parent's basis in assets (§334(b)) | $200,000 (carryover) |
Real-World Scenario (TY 2025)
Scenario: A C corporation liquidates in 2025. Its only asset is land with basis $50,000 and FMV $150,000. Sole shareholder has stock basis of $60,000.
- Corporate level (§336): Gain = $150,000 - $50,000 = $100,000. Tax = $100,000 × 21% = $21,000.
- Net distribution: $150,000 - $21,000 = $129,000.
- Shareholder level (§331): Gain = $129,000 - $60,000 = $69,000. Tax ≈ $13,800 at 20%.
- Total tax: ≈ $34,800 on $100,000 economic gain.
- If shareholder were a parent corporation owning 80%+: §332 applies — no corporate or shareholder gain; parent takes $50,000 carryover basis in the land.
On the Exam
Expect 3-4 questions on liquidation, typically:
- Corporate Gain Questions: "Corporation liquidates property. What is the gain?"
- Shareholder Gain Questions: "Shareholder receives $X in liquidation. What is the gain?"
- §332 Questions: "When is parent-subsidiary liquidation tax-free?"
- §334(b) Basis Questions: "What is the parent's basis in subsidiary assets after a §332 liquidation?"
The key is to remember: Double tax on liquidation. Corp recognizes gain at 21% (§336). Shareholder recognizes CG (§331). Parent-subsidiary (80%+) = tax-free (§332/§337). Parent takes carryover basis (§334(b)).
Corporation liquidates, distributes property FMV $300k, basis $180k. Corporate gain?
When is parent-subsidiary liquidation tax-free?
In a §332 liquidation, what is the parent basis in assets received?