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For the corporation in the process of complete liquidation, Sections 336 and 337 govern the tax results.
The general rules relating to complete liquidations are covered in Section 336 which provides that gain or loss is recognized to the distributing corporation.
The amount that is recognized to the shareholder is the difference between the fair market value of the assets received from the corporation and the adjusted basis of the stock surrendered (realized gain or loss).
Capital gain or loss results to the stockholder if the asset is a capital asset in the hands of the stockholder.
A liquidation will occur even though the corporation retains a nominal amount of assets to pay any remaining debts and preserves its legal status. The business may have been unsuccessful, or the shareholders may decide to terminate the corporate existence and acquire the assets of the corporation.
Generally speaking, a liquidation occurs when a person or a corporation wants to purchase the assets of the corporation.
Otherwise, the stock will be deemed to have a zero basis, and the full amount of the liquidation proceeds represents the amount of the gain to be recognized.
The second prevents a built-in loss that was contributed to the corporation shortly before the adoption of a plan of liquidation.
Thus, the loss is disallowed even if the property distribution is to an unrelated party.
For a complete liquidation, Section 331 (a) (1) provides for exchange treatment, and Section 1101 (c) requires the recognition of gain or loss on the sale or exchange of property.
The result is that the shareholder is treated as having sold his or her stock to the liquidating corporation.