Category: Sales & Exchanges; Accounting
Periods & Methods Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Background There is a provision in the tax code allowing installment notes in corporate liquidations, but there is a 12-month time period associated with these rules. Issue Answer Discussion a) any gain inherent in the installment obligation would be immediately triggered at the corporate level (Section 453B); and b) the shareholder receiving the liquidating distribution would be taxed on the full fair market value of the installment obligation to the extent such value exceeds the basis of the shareholder's stock (Section 331(a)). Two special rules exist to mitigate the results set forth above. 1. The first special rule is Section 453(h) which says the shareholder is not taxed on the full fair market value of the distributed installment obligation if: a) the installment obligation results from the sale of corporate assets occurring within 12 months after the adoption of a plan of complete liquidation; and b) the corporation is actually liquidated within 12 months after the adoption of the plan of liquidation. This is the source of the 12-month rule with which you are concerned. The second special rule applies only to S corporations. This rule, Section 453B(h), says that the gain on distribution of an installment obligation is not triggered by liquidation of an S corporation if the requirements of the first special rule set forth above (Section 453(h), in other words the 12-month rule) are met. Accordingly, two special relief provisions turn on satisfaction of the 12-month rule. Consider the plain words of the statute. If, in a liquidation to which section 331 applies, the shareholder receives (in exchange for the shareholder's stock) an installment obligation acquired in respect of a sale or exchange by the corporation during the 12-month period beginning on the date a plan of complete liquidation is adopted and the liquidation is completed during such 12-month period, then, for purposes of this section, the receipt of payments under such obligation (but not the receipt of such obligation) by the shareholder shall be treated as the receipt of payment for the stock. [Emphasis added.] The statute seems very clear on its face that three things are required to meet the 12-month rule. First, there must be a formal plan of complete liquidation. Simply, the board of directors of TP should make a formal resolution to sell the assets of the corporation and distribute the proceeds in complete liquidation pursuant to Section 331 of the Internal Revenue Code of 1986 as amended. This resolution should be drafted by a competent attorney in your jurisdiction. I will include samples of such resolutions by mail. File IRS Form 966 in accordance with its instructions within 30 days of adoption of the resolution including a certified copy of the resolution with the filing. This is really important. Second, any installment obligation for which special treatment is desired must have arisen as a result of selling corporate assets during the 12-month liquidation period. Third, all liquidating distributions and the actual formal dissolution of TP under the laws of TP's state must be accomplished within 12 months after adoption of the plan of liquidation. It is clear that one is merely required to distribute the installment obligation in complete liquidation within the 12-month period, not completely collect the obligation within that time frame. Note: special rules apply to any installment obligation or portion thereof derived from sale of inventory. See Section 453(h)(1)(B). Please feel free to contact me if you need further assistance with this sub-issue. |
