Complete Liquidation of the Corporate Subsidiary: The Questions, Some Answers and Some Observations

Various sections of the Internal Revenue Code of 1954 have been enacted to influence the economy in one manner or another. During the period from 1930 to 1935, elimination of holding companies was an important topic. Many felt that elimination of holding company structures would at least partially relieve the existing economic depression. At that time the complete liquidation of a corporate subsidiary was treated as a taxable transaction. President Roosevelt urged Congress to create a favorable tax atmosphere for such liquidations to encourage "simplification of our corporate structures through the elimination of unnecessary holding companies in all lines of business." As a result, Congress provided a new tax policy toward liquidations of corporate subsidiaries which first appeared as section 110(a) of the Revenue Act of 1935, became section 112(b)(6) of the Internal Revenue Code of 1939 and now, in slightly modified form, appears as section 332 of the Internal Revenue Code of 1954. Although intended to be a rather simple relief provision, the application of section 332 in a particular situation may create a number of problems. The problems which may occur have been compounded by the enactment of the special basis provisions of section 334(b)(2) in 1954. The tax practitioner must be thoroughly familiar with the rather intricate rules relating to the complete liquidation of a corporate subsidiary prior to advising a client that such a liquidation will accomplish the result desired. Without careful study, the intended tax relief or benefit might be converted into a serious tax detriment.