26 U.S.C. § 334 — Basis of property received in liquidations

Page 1105 TITLE 26—INTERNAL REVENUE CODE § 334 and any sale or exchange, made by a corporation after July 31, 1986, unless such corporation is completely liq- uidated before Jan. 1, 1987, any transaction described in section 338 of this title for which the acquisition date occurs after Dec. 31, 1986, and any distribution, not in complete liquidation, made after Dec. 31, 1986, with ex- ceptions and special and transitional rules, see section 633 of Pub. L. 99–514, set out as an Effective Date note under section 336 of this title. Pub. L. 99–514, title XVIII, § 1804(e)(6)(B), Oct. 22, 1986, 100 Stat. 2803, provided that: ‘‘(i) IN GENERAL.—Except as provided in clause (iii), the amendment made by subparagraph (A) [amending this section] shall apply with respect to plans of com- plete liquidation adopted after March 28, 1985. ‘‘(ii) CERTAIN DISTRIBUTIONS MADE AFTER DECEMBER 31, 1984.—Except as provided in clause (iii), the amendment made by subparagraph (A) shall also apply with respect to plans of complete liquidations adopted on or before March 28, 1985, pursuant to which any distribution is made in a taxable year beginning after December 31, 1984 (December 31, 1983, in the case of an affiliated group to which an election under section 60(b)(7) of the Tax Reform Act of 1984 [Pub. L. 98–369, set out as a note under section 1504 of this title] applies), but only if the liquidating corporation and any corporation which re- ceives a distribution in complete liquidation of such corporation are members of an affiliated group of cor- porations filing a consolidated return for the taxable year which includes the date of the distribution. ‘‘(iii) TRANSITIONAL RULE FOR AFFILIATED GROUPS.— The amendment made by subparagraph (A) shall not apply with respect to plans of complete liquidation if the liquidating corporation is a member of an affiliated group of corporations under section 60(b) (2), (5), (6), or (8) of the Tax Reform Act of 1984 [Pub. L. 98–369, set out as a note under section 1504 of this title], for all taxable years which include the date of any distribution pursu- ant to such plan.’’ SAVINGS PROVISION For provisions that nothing in amendment by Pub. L. 115–141 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Mar. 23, 2018, for purposes of determining li- ability for tax for periods ending after Mar. 23, 2018, see section 401(e) of Pub. L. 115–141, set out as a note under section 23 of this title. PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989 For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title. [§ 333. Repealed. Pub. L. 99–514, title VI, § 631(e)(3), Oct. 22, 1986, 100 Stat. 2273] Section, acts Aug. 16, 1954, ch. 736, 68A Stat. 103; Feb. 26, 1964, Pub. L. 88–272, title II, § 225(g), 78 Stat. 89; Oct. 4, 1976, Pub. L. 94–455, title XIX, §§ 1901(a)(44), 1906(b)(13)(A), 1951(b)(6)(A), 90 Stat. 1772, 1834, 1838, re- lated to election as to recognition of gain in certain liquidations. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF REPEAL Repeal applicable to any distribution in complete liq- uidation, and any sale or exchange, made by a corpora- tion after July 31, 1986, unless such corporation is com- pletely liquidated before Jan. 1, 1987, any transaction described in section 338 of this title for which the ac- quisition date occurs after Dec. 31, 1986, and any dis- tribution, not in complete liquidation, made after Dec. 31, 1986, with exceptions and special and transitional rules, see section 633 of Pub. L. 99–514, set out as an Ef- fective Date note under section 336 of this title. § 334. Basis of property received in liquidations (a) General rule If property is received in a distribution in complete liquidation, and if gain or loss is rec- ognized on receipt of such property, then the basis of the property in the hands of the dis- tributee shall be the fair market value of such property at the time of the distribution. (b) Liquidation of subsidiary (1) In general If property is received by a corporate dis- tributee in a distribution in a complete liq- uidation to which section 332 applies (or in a transfer described in section 337(b)(1)), the basis of such property in the hands of such dis- tributee shall be the same as it would be in the hands of the transferor; except that, in the hands of such distributee— (A) the basis of such property shall be the fair market value of the property at the time of the distribution in any case in which gain or loss is recognized by the liquidating corporation with respect to such property, and (B) the basis of any property described in section 362(e)(1)(B) shall be the fair market value of the property at the time of the dis- tribution in any case in which such distributee’s aggregate adjusted basis of such property would (but for this subpara- graph) exceed the fair market value of such property immediately after such liquidation. (2) Corporate distributee For purposes of this subsection, the term ‘‘corporate distributee’’ means only the cor- poration which meets the stock ownership re- quirements specified in section 332(b). (Aug. 16, 1954, ch. 736, 68A Stat. 104; Pub. L. 89–809, title II, § 202(a), (b), Nov. 13, 1966, 80 Stat. 1576; Pub. L. 94–455, title XIX, §§ 1901(a)(45), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1772, 1834; Pub. L. 97–248, title II, §§ 222(e)(1)(C), 224(b), Sept. 3, 1982, 96 Stat. 480, 488; Pub. L. 99–514, title VI, § 631(e)(4), Oct. 22, 1986, 100 Stat. 2273; Pub. L. 100–647, title I, § 1006(e)(6), Nov. 10, 1988, 102 Stat. 3401; Pub. L. 105–277, div. J, title III, § 3001(b)(2), Oct. 21, 1998, 112 Stat. 2681–904; Pub. L. 108–357, title VIII, § 836(b), Oct. 22, 2004, 118 Stat. 1595; Pub. L. 109–135, title IV, § 403(dd)(1), Dec. 21, 2005, 119 Stat. 2630.) Editorial Notes AMENDMENTS 2005—Subsec. (b)(1). Pub. L. 109–135 substituted ‘‘ex- cept that, in the hands of such distributee—’’ for ‘‘ex- cept that the basis of such property in the hands of such distributee shall be the fair market value of the property at the time of the distribution—’’ in introduc- tory provisions, added subpars. (A) and (B), and struck out former subpars. (A) and (B) which read as follows: ‘‘(A) in any case in which gain or loss is recognized by the liquidating corporation with respect to such property, or Page 1106 TITLE 26—INTERNAL REVENUE CODE § 334 ‘‘(B) in any case in which the liquidating corporation is a foreign corporation, the corporate distributee is a domestic corporation, and the corporate distributee’s aggregate adjusted bases of property described in sec- tion 362(e)(1)(B) which is distributed in such liquidation would (but for this subparagraph) exceed the fair mar- ket value of such property immediately after such liq- uidation.’’ 2004—Subsec. (b)(1). Pub. L. 108–357 reenacted heading without change and amended text of par. (1) generally. Prior to amendment, text read as follows: ‘‘If property is received by a corporate distributee in a distribution in a complete liquidation to which section 332 applies (or in a transfer described in section 337(b)(1)), the basis of such property in the hands of such distributee shall be the same as it would be in the hands of the trans- feror; except that, in any case in which gain or loss is recognized by the liquidating corporation with respect to such property, the basis of such property in the hands of such distributee shall be the fair market value of the property at the time of the distribution.’’ 1998—Subsec. (b)(1). Pub. L. 105–277 substituted ‘‘sec- tion 332’’ for ‘‘section 332(a)’’. 1988—Subsec. (b). Pub. L. 100–647 amended subsec. (b) generally. Prior to amendment, subsec. (b) read as fol- lows: ‘‘(1) DISTRIBUTION IN COMPLETE LIQUIDATION.—If prop- erty is received by a corporation in a distribution in a complete liquidation to which section 332(a) applies, the basis of the property in the hands of the distributee shall be the same as it would be in the hands of the transferor. ‘‘(2) TRANSFERS TO WHICH SECTION 332(c) APPLIES.—If property is received by a corporation in a transfer to which section 332(c) applies, the basis of the property in the hands of the transferee shall be the same as it would be in the hands of the transferor. ‘‘(3) DISTRIBUTEE DEFINED.—For purposes of this sub- section, the term ‘distributee’ means only the corpora- tion which meets the 80-percent stock ownership re- quirements specified in section 332(b).’’ 1986—Subsec. (a). Pub. L. 99–514, § 631(e)(4)(A), struck out ‘‘(other than a distribution to which section 333 ap- plies)’’ after ‘‘liquidation’’. Subsec. (c). Pub. L. 99–514, § 631(e)(4)(B), struck out subsec. (c) relating to property received in liquidation under section 333. 1982—Subsec. (a). Pub. L. 97–248, § 222(e)(1)(C), struck out ‘‘partial or’’ before ‘‘complete liquidation’’. Subsec. (b). Pub. L. 97–248, § 224(b), struck out heading to par. (1) ‘‘In general’’, redesignated first sentence as par. (1) with heading ‘‘Distribution in complete liquida- tion’’, in par. (1) as so redesignated substituted ref- erence to section 332(a) for reference to section 332(b) relating to a distribution in complete liquidation, struck out reference to par. (2) as an exception to the determination of basis, redesignated second sentence as par. (2) with heading ‘‘Transfers to which section 332(c) applies’’, in par. (2) as so redesignated struck out ref- erence to par. (2) as an exception to the determination of basis, struck out par. (2) which had provided that if property was received by a corporation in a distribu- tion in complete liquidation of another corporation and if the distribution was pursuant to a plan of liquidation adopted not more than 2 years after the date of the transaction described below, or in the case of a series of transactions, the date of the last such transaction, and stock of the distributing corporation possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote, and at least 80 per- cent of the total number of shares of all other classes of stock (except nonvoting stock which was limited and preferred as to dividends), was acquired by the dis- tributee by purchase (as defined in par. (3)) during a 12- month period beginning with the earlier of the date of the first acquisition by purchase of such stock, or if any of such stock was acquired in an acquisition which is a purchase within the meaning of second sentence of par. (3), the date on which the distributee was first con- sidered under section 318(a) as owning stock owned by the corporation from which such acquisition was made, then the basis of the property in the hands of the dis- tributee would be the adjusted basis of the stock with respect to which the distribution was made, and under regulations prescribed by the Secretary, proper adjust- ment in the adjusted basis of any stock would be made for any distribution made to the distributee with re- spect to such stock before the adoption of the plan of liquidation, for any money received, for any liabilities assumed or subject to which the property was received, and for other items, and struck out par. (3) which pro- vided that ‘‘purchase’’ meant any acquisition of stock, but only if the basis of the stock in the hands of the distributee was not determined in whole or in part by reference to the adjusted basis of such stock in the hands of the person from whom acquired, or under sec- tion 1014(a) of this title the stock was not acquired in an exchange to which section 351 of this title applies, and the stock was not acquired from a person the own- ership of whose stock would, under section 318(a) of this title, be attributed to the person acquiring such stock, but that ‘‘purchase’’ also meant an acquisition of stock from a corporation when ownership of such stock would be attributed under section 318(a) to the person acquir- ing such stock, if the stock of such corporation by rea- son of which such ownership would be attributed was acquired by purchase, and redesignated par. (4) as (3). 1976—Subsec. (b)(2). Pub. L. 94–455, §§ 1901(a)(45), 1906(b)(13)(A), struck out in subpar. (A) provision relat- ing to distributions made pursuant to a plan of liquida- tion adopted on or before June 22, 1954, and in provi- sions following subpar. (B)(ii) ‘‘or his delegate’’ after ‘‘Secretary’’. 1966—Subsec. (b)(2)(B). Pub. L. 89–809, § 202(b), inserted provisions for the determination of the date on which to commence the running of the 12-month period during which the distributee must have acquired the stock by purchase by adding clauses (i) and (ii). Subsec. (b)(3). Pub. L. 89–809, § 202(a), inserted provi- sion that, for purposes of par. (2)(B), ‘‘purchase’’ also means an acquisition of stock from a corporation when ownership of such stock would be attributed under sec- tion 318(a) to the person acquiring such stock, if the stock of such corporation by reason of which such own- ership would be attributed was acquired by purchase. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2005 AMENDMENT Amendment by Pub. L. 109–135 effective as if included in the provision of the American Jobs Creation Act of 2004, Pub. L. 108–357, to which such amendment relates, see section 403(nn) of Pub. L. 109–135, set out as a note under section 26 of this title. EFFECTIVE DATE OF 2004 AMENDMENT Pub. L. 108–357, title VIII, § 836(c)(2), Oct. 22, 2004, 118 Stat. 1596, provided that: ‘‘The amendment made by subsection (b) [amending this section] shall apply to liquidations after the date of the enactment of this Act [Oct. 22, 2004].’’ EFFECTIVE DATE OF 1998 AMENDMENT Amendment by Pub. L. 105–277 applicable to distribu- tions after May 21, 1998, see section 3001(c) of Pub. L. 105–277, set out as a note under section 332 of this title. EFFECTIVE DATE OF 1988 AMENDMENT Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Amendment by Pub. L. 99–514 applicable to any dis- tribution in complete liquidation, and any sale or ex- change, made by a corporation after July 31, 1986, un- Page 1107 TITLE 26—INTERNAL REVENUE CODE § 336 less such corporation is completely liquidated before Jan. 1, 1987, any transaction described in section 338 of this title for which the acquisition date occurs after Dec. 31, 1986, and any distribution, not in complete liq- uidation, made after Dec. 31, 1986, with exceptions and special and transitional rules, see section 633 of Pub. L. 99–514, set out as an Effective Date note under section 336 of this title. EFFECTIVE DATE OF 1982 AMENDMENT Amendment by section 222(e)(1)(C) of Pub. L. 97–248 applicable to distributions after Aug. 31, 1982, with ex- ceptions for certain partial liquidations, see section 222(f) of Pub. L. 97–248, set out as a note under section 302 of this title. Amendment by section 224(b) of Pub. L. 97–248 appli- cable to any target corporation with respect to which the acquisition date occurs after Aug. 31, 1982, with spe- cial rules for certain acquisitions before Sept. 1, 1982, and certain acquisitions of financial institutions in which there was a binding contract on July 22, 1982, to acquire control, see section 224(d) of Pub. L. 97–248, set out as an Effective Date note under section 338 of this title. EFFECTIVE DATE OF 1976 AMENDMENT Amendment by section 1901(a)(45) of Pub. L. 94–455 ef- fective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Pub. L. 89–809, title II, § 202(d), Nov. 13, 1966, 80 Stat. 1576, provided that: ‘‘The amendment made by sub- section (a) [amending this section] shall apply only with respect to acquisitions of stock after December 31, 1965. The amendment made by subsections (b) and (c) [amending this section and section 453 of this title] shall apply only with respect to distributions made after the date of the enactment of this Act [Nov. 13, 1966].’’ ADJUSTMENT FOR LIABILITY TO BASIS OF PROPERTY DISTRIBUTED IN COMPLETE LIQUIDATION OF CORPORA- TION PRIOR TO JULY 1, 1957; DEDUCTION FOR UNCOM- PENSATED LIABILITY Pub. L. 93–497, § 3, Oct. 29, 1974, 88 Stat. 1534, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘‘(a) Notwithstanding the provisions of section 334 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (relating to basis of property received in liquidations), no adjustment to the basis of any property distributed in complete liquidation of a corporation prior to July 1, 1957, shall be made for any liability if— ‘‘(1) the distributor and distributee did not consider the liability relevant to the value of the stock with respect to which the distribution was made, ‘‘(2) the distributor and distributee reasonably re- lied upon a decision of a United States district court specifically adjudicating the amount of the liability and its affirmance by the appropriate United States court of appeals, and ‘‘(3) the amount of liability so adjudicated was not greater than would be compensated for by insurance. The provisions of this section apply without regard to whether such decision was subsequently reversed or modified by that United States court of appeals fol- lowing distribution of such property in complete liq- uidation. ‘‘(b) To the extent that the liability described in sub- section (a) is not compensated for by insurance or oth- erwise, the amount thereof shall be allowed as a deduc- tion under the appropriate provision of the Internal Revenue Code of 1986 for the taxable year in which pay- ment thereof was made and shall be effective in deter- mining income tax liabilities of all taxable years prior thereto.’’ SUBPART B—EFFECTS ON CORPORATION Sec. 336. Gain or loss recognized on property distrib- uted in complete liquidation. 337. Nonrecognition for property distributed to parent in complete liquidation of sub- sidiary. 338. Certain stock purchases treated as asset ac- quisitions. Editorial Notes AMENDMENTS 1986—Pub. L. 99–514, title VI, § 631(e)(17), Oct. 22, 1986, 100 Stat. 2275, substituted ‘‘Gain or loss recognized on property distributed in complete liquidation’’ for ‘‘Gen- eral rule’’ in item 336 and ‘‘Nonrecognition for property distributed to parent in complete liquidation of sub- sidiary’’ for ‘‘Gain or loss on sales or exchanges in con- nection with certain liquidations’’ in item 337. 1982—Pub. L. 97–248, title II, § 224(c)(9), Sept. 3, 1982, 96 Stat. 489, substituted ‘‘Certain stock purchases treated as asset acquisitions’’ for ‘‘Effect on earnings and prof- its’’ in item 338. § 336. Gain or loss recognized on property dis- tributed in complete liquidation (a) General rule Except as otherwise provided in this section or section 337, gain or loss shall be recognized to a liquidating corporation on the distribution of property in complete liquidation as if such prop- erty were sold to the distributee at its fair mar- ket value. (b) Treatment of liabilities If any property distributed in the liquidation is subject to a liability or the shareholder as- sumes a liability of the liquidating corporation in connection with the distribution, for purposes of subsection (a) and section 337, the fair market value of such property shall be treated as not less than the amount of such liability. (c) Exception for liquidations which are part of a reorganization For provision providing that this subpart does not apply to distributions in pursuance of a plan of re- organization, see section 361(c)(4). (d) Limitations on recognition of loss (1) No loss recognized in certain distributions to related persons (A) In general No loss shall be recognized to a liquidating corporation on the distribution of any prop- erty to a related person (within the meaning of section 267) if— (i) such distribution is not pro rata, or (ii) such property is disqualified prop- erty. (B) Disqualified property For purposes of subparagraph (A), the term ‘‘disqualified property’’ means any property which is acquired by the liquidating corpora- tion in a transaction to which section 351 ap- plied, or as a contribution to capital, during the 5-year period ending on the date of the distribution. Such term includes any prop- erty if the adjusted basis of such property is determined (in whole or in part) by reference to the adjusted basis of property described in the preceding sentence.