Tax attributes of liquidating corporations

But when the QSub operations are sold, a tax pitfall may loom.

straight-line depreciation for accounting purposes versus accelerated depreciation for tax purposes).The taxable gain, if any, recognized by the seller (either individual investors or corporate shareholders) upon the sale of stock or assets is equal to the purchase price less the tax basis in the stock or assets sold.For a business reason such as segregation of assets and liabilities or maintenance of contractual obligations, it may be prudent to establish certain S corporation operations in a separate subsidiary.However, an S corporation may not have another corporation as a shareholder.Tax Management Portfolio, Corporate Liquidations, No. 784-3rd, analyses the tax considerations in connection with the liquidation of a corporation.

The principal focus of the Portfolio is on liquidations after the repeal of the General Utilities doctrine by the Tax Reform Act of 1986. When a parent company develops a subsidiary internally, rather than through acquisition, the parent's inside and outside bases in the assets and stock of the subsidiary, respectively, are equal. Many small companies, including real estate-related ventures, elect to be treated as S corporations with the Internal Revenue Service.If it did, the S corporation's subsidiary would be a C corporation, which is not the pass-through entity treatment desired by S corporation clients.This document contains final regulations under section 1502 of the Internal Revenue Code that provide guidance regarding the manner in which the items (including items described in section 381(c) but excluding intercompany items under ยง1.1502-13) of a liquidating corporation are succeeded to and taken into account in cases in which multiple members acquire the assets of the liquidating corporation in a complete liquidation to which section 332 applies.If the tax basis exceeds the sale price, the seller recognizes a loss on the transaction rather than a gain.