Under what circumstances does a liquidating corporation not recognize a gain or loss when making a distribution?

Question

What will be an ideal response?

Answer 1

A liquidating corporation does not recognize gain or loss under four circumstances. These are:
1) Liquidation of a subsidiary corporation - The liquidating corporation recognizes no gain or loss on liquidating distributions made to a parent corporation that owns at least 80% of the subsidiary's stock.
2) Distributions to minority shareholders - The liquidating corporation recognizes gain but not loss on liquidating distributions made to minority shareholders when the Sec. 332 nonrecognition rules apply to the parent corporation.
3) Distributions to related persons - Loss recognition is disallowed when the liquidating corporation makes a distribution to a related person, as defined in Sec. 267(b), if (1) the distribution is not pro rata or (2) the property distributed is disqualified property. Disqualified property is property acquired by the corporation in a Sec. 351 tax-free formation or as a capital contribution during the five-year period ending on the distribution date or property having an adjusted basis that carries over from a disqualified property.
4) Sales having a tax-avoidance purpose - Loss recognition is restricted where property is transferred to the corporation in a Sec. 351 transaction or capital contribution after a date two years before the date that the corporation adopts a plan of complete liquidation. Tax avoidance is inferred in these situations unless the corporation uses the property in its trade or business.

A less-often encountered situation involves distributions or sales of a subsidiary corporation's stock. A corporation can elect under Sec. 336(e) to treat the sale, exchange, or distribution of a subsidiary's stock as a disposition of all the subsidiary's assets, resulting in no gain or loss being recognized on the sale, exchange, or distribution of the stock