Under Code Section 332, no gain or loss is recognized by a parent corporation on the receipt of property distributed in complete liquidation of a subsidiary.
Basically, the subsidiary’s basis for assets carries over to the parent corporation so that any deferred gain or loss at time of liquidation is recognized if the parent subsequently sells the liquidated subsidiary’s former assets. In order to qualify for Nonrecognition under Section 332, three requirements must be met. These requirements are listed below.
80 Percent Ownership
The first requirement that must be met is the 80 percent ownership requirement. The parent corporation must own at least 80 percent of the combined voting power and at least 80 percent of the total value of all the stock of the subsidiary corporation on the date that the plan for liquidation is put in place.
Cancellation of Stock
The second requirement involves the distribution in complete cancellation or redemption of all of the subsidiary’s stock. Legal dissolution of the subsidiary however, is not a requirement under Section 332.
It should also be noted that a minimal amount of assets may be retained by the subsidiary in order to protect its legal existence and preserve its corporate charter.
The last requirement in involves the timing of the liquidating distribution. There are basically two alternative time periods during which the liquidating distributions must take place:
1. No formal plan of liquidation needs to be put in place if all liquidating distributions are made within one taxable year of the subsidiary.
2. 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.
It is important to note that if any of the above three requirements are not met, Section 332 will not apply, and the liquidating distributions will be taxed under Section 331.