Revenue Ruling 82-35: Corporate Liquidations
Rev. Rul. 82-35 provides key guidance on structuring a subsidiary's asset sale and subsequent tax-free liquidation distribution to its parent company.
Revenue Ruling 82-35 provides guidance for corporations undergoing a complete liquidation. It addresses a scenario where a subsidiary corporation sells some of its assets before distributing all remaining property to its parent company. The ruling clarifies how the Internal Revenue Service (IRS) interprets the timeline of a liquidation plan, which has substantial tax implications for both the parent and the subsidiary.
The Ruling’s Central Holding
Revenue Ruling 82-35 centers on when a “plan of liquidation” is officially adopted. The ruling clarifies that a formal resolution by a corporation’s board of directors is not the only way to establish the start of a liquidation. Instead, the plan can be considered informally adopted on the date the subsidiary enters into a binding agreement to sell a significant portion of its assets, provided it also ceases its primary business operations.
The specific scenario addressed involves a subsidiary that sells some operating assets to a third party for cash. Following this sale, the subsidiary distributes the cash and all its other remaining assets to its parent corporation. The date of the asset sale agreement can mark the beginning of the liquidation period, provided the subsequent distribution is part of an integrated plan to cease business and dissolve.
Conditions for Favorable Treatment
For the tax treatment to apply, several conditions must be met, aligning with Internal Revenue Code (IRC) Section 332. The parent corporation must own at least 80% of the total voting power and value of the subsidiary’s stock.
Another condition is that the subsidiary must be solvent at the time of the liquidation, meaning the fair market value of its assets exceeds its liabilities. If the subsidiary is insolvent, the parent would not receive assets as a shareholder after creditors are paid, and the transaction would not qualify for tax-free treatment under Section 332.
The final liquidating distribution must occur within a specific statutory timeframe. The distribution of all property must be completed either within the taxable year the first distribution is made or within three years from the close of that taxable year.
Resulting Tax Consequences
The overall transaction is split into two distinct events for tax purposes. The initial sale of assets by the subsidiary to an unrelated third party is a taxable event. The subsidiary must recognize a gain or loss on this sale, calculated as the difference between the cash received and the tax basis of the assets sold.
The subsequent distribution of cash and all remaining assets from the subsidiary to the parent corporation qualifies for tax-free treatment under Section 332. The parent corporation recognizes no gain or loss upon receiving the distribution. Under Section 337, the liquidating subsidiary also does not recognize gain or loss on the assets it distributes directly to its parent.