If, When, and How to Liquidate
by FREDERICK W. BASSINGER Partner, Minneapolis Office
Presented before the Wisconsin Society of Certified Public
Accountants—October 1969, and before the Minnesota Society of Certified Public Accountants—November 1969
A CORPORATE LIQUIDATION takes place when the corporation's share-
holders elect to wind up its business affairs and to distribute the net assets to the interested parties. The corporation need not convert the assets to cash prior to the distribution, although this often happens.
In addition to compelling tax reasons, a corporation may be liquidated
for economic motives. An obvious example would be a corporation that has been losing money and whose prognosis is not particularly encouraging. It could also be that the corporation is not necessarily losing money, but is not making enough money. In other words, the shareholders feel they could make better use of the corporate assets elsewhere.
If the corporation to be liquidated is a subsidiary of another corporation,
it may be that the parent corporation merely desires to simplify its corporate structure. It may also be that there is a compelling tax reason to liquidate. This could come about if:
• A subsidiary has an operating loss carryover or other tax attributes
that would benefit the parent under section 381, IRC.
• The present fair market value of the subsidiary's property is higher or lower than the subsidiary's tax basis.
• The parent has a capital loss that it desires to offset against a capital gain in a taxable liquidation.
• Stock of the subsidiary has been purchased by the parent for the sole purpose of obtaining its underlying assets.
• A small number of dissenting shareholders are trying to prevent a takeover by another company. The majority can, in effect, force them to sell their stock by having the corporation sell its assets to the acquirer and then liquidate the old company.
• The parties desire to avoid the "reverse acquisition" consequences that could follow certain acquisitions.
Before analyzing the tax consequences of accomplishing a liquidation