What’s the Difference? Liquidation vs. Dissolution

An anomaly described in a recent IRS ruling says there is a big, but subtle, difference.

Contributor Robert Willens, founder and principle of Robert Willens LLC, writes a regular tax column for CFO.com.


*Except in instances where the liquidation is governed by Section 332(a), and Section 337(a). In that case, the distributee shareholder is another corporation which owns at least 80 percent of the voting power and value of the liquidating entity’s stock on the date of the planned complete liquidation is adopted and all times thereafter until the receipt of the property.)

**When a complete liquidation is followed by a pre-arranged transfer of all or part of its essential operating assets to a second (almost always newly-created) controlled corporation, the steps may be “collapsed” and treated as a single, unitary transaction which bears an unmistakable resemblance to a reorganization. Such a transaction is popularly known as a liquidation/reincorporation. (See Bittker and Eustice, Federal Income Taxation of Corporations and Shareholders at Para. 12.64. See also Reg. Sec. 1.331-1(c) “…a liquidation which is followed by a transfer to another corporation of all or part of the assets of the liquidating corporation…may have the effect of…a transaction in which no loss is recognized and gain is recognized only to the extent of other property…”) In LTR 200806006, however, it is highly unlikely that, if the dissolution had caused a liquidation, such liquidation would have been “stepped together” with the reincorporation (to find a reorganization). In the instant case, the corporate taxpayer would have been unaware of the fact that it had been completely liquidated and, thus, its eventual reincorporation, in belated response to such liquidation, could not be seen as part of a unitary transaction which encompassed both the liquidation and reincorporation. (See in this regard William C. Kind v. Commissioner, 54 T.C. 600 (1970) (Acq.))


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