Opinion ID: 415638
Heading Depth: 1
Heading Rank: 5

Heading: the liquidation theory

Text: 60 Although we hold that Security's acquisitions of Southern and Standard do not warrant F reorganization treatment, our inquiry does not end here, for an alternative statutory ground may support Security's attempt to carry over the policyholders surplus accounts. Section 381(a) permits the carryover of certain tax attributes from an acquired corporation to an acquiring corporation under two sets of circumstances: (1) when the acquisition is a reorganization described in section 368(a)(1)(A), (C), (D), (F), or (G); or (2) when the acquisition is a complete liquidation under section 332 to which the basis rule of section 334(b)(2) does not apply. Thus, even if the acquisitions of Southern and Standard are not F reorganizations, Security may carry over the policyholders surplus accounts if the transactions involving Southern and Standard are construed as the type of liquidation permissible under section 381(a). 61 Section 332 governs the complete liquidation of a subsidiary by its parent and provides the general rule that a parent corporation recognizes no gain or loss upon the receipt of property from its liquidated subsidiary. I.R.C. Sec. 332(a). In order for section 332 to apply, the parent corporation must own eighty percent of the stock of its subsidiary. I.R.C. Sec. 332(b). 62 Section 334(b)(2) determines the basis of the property received by a parent corporation upon the liquidation of its controlled subsidiary pursuant to section 332. The general rule of section 334(b)(1) imposes a carryover basis rule; the basis of the property in the hands of the parent corporation following a section 332 liquidation is the same as the pre-liquidation basis of the property in the hands of the subsidiary. Section 334(b)(2) provides an exception to this general rule, to be applied when the parent corporation acquired at least eighty percent of the stock of the subsidiary by purchase during a period of not more than twelve months and the liquidation is undertaken pursuant to a plan of complete liquidation adopted not more than two years after the purchase. When section 334(b)(2) applies, the parent corporation's basis for the property acquired in a section 332 transaction is the cost of the subsidiary's stock to the parent. 15 An objective test governs the application of the basis rule of section 334(b)(2); if the liquidation satisfies the statutory conditions, the subsidiary's assets acquire a new basis in the hands of the parent corporation. In re Chrome Plate, Inc., 614 F.2d 990, 995 (5th Cir.1980) (citing cases); Kansas Sand & Concrete, Inc. v. Commissioner, 462 F.2d 805, 808 (10th Cir.1972); Estate of Glass v. Commissioner, 460 F.2d 321, 322 (5th Cir.1972). 63 Security argues that it acquired the assets of Southern and Standard in complete liquidations under section 332 to which section 334(b)(2) does not apply. At no time, however, was Security the parent of Southern or Standard within the meaning of section 332. See I.R.C. Sec. 332(b) (requiring eighty percent stock ownership to establish parent-subsidiary relationship). Therefore, in order for the liquidation argument to succeed, Security must show that: 64 (1) The liquidations of Southern and Standard and the transfers of their assets to OIC were section 332 complete liquidations to which section 334(b)(2) does not apply; and 65 (2) The favorable tax treatment of Southern's and Standard's policyholders surplus accounts accruing to OIC from such liquidations was transferred from OIC to Security when Security acquired the assets of Southern and Standard. 66 We find it unnecessary to address the second leg of this analysis, for we conclude that the liquidations of Southern and Standard by OIC fell squarely within the statutory framework of section 334(b)(2). OIC was the parent of both Southern and Standard, having acquired more than the required eighty percent of the stock of each corporation within the statutory twelve-month time span. See I.R.C. Secs. 332(b), 334(b)(2)(B). The plans to liquidate Southern and Standard were adopted within two years of the stock purchases; in fact, in each case the plan of liquidation was adopted within days of the stock acquisition. See I.R.C. Sec. 334(b)(2)(A). Finally, OIC received all the property of Southern and Standard in distributions in complete liquidation of the two corporations. I.R.C. Sec. 334(b)(2). This sequence of events illustrates a paradigmatic section 332 liquidation of a subsidiary by a parent subject to the basis rule of section 334(b)(2). Under established precedent, if a corporate transaction complies with the provisions of section 334(b)(2), the special rule of that section applies automatically. Chrome Plate, 614 F.2d at 995; Kansas Sand, 462 F.2d at 808; Estate of Glass, 460 F.2d at 322. 67 We hold, therefore, that the liquidations of Southern and Standard by OIC were section 332 complete liquidations to which section 334(b)(2) does apply. Consequently, Security cannot claim entitlement to the carryovers of Southern's and Standard's policyholders surplus accounts on the basis of the liquidation leg of section 381(a). As we have previously determined, Security also fails to qualify for the carryovers under the alternative segment of section 381(a) because the acquisitions of Southern and Standard did not satisfy the requirements of F reorganizations. Thus, under section 815(d)(2)(A), Southern and Standard must include in taxable income the amounts remaining in their policyholders surplus accounts at the end of the taxable years preceding their respective terminations as insurance companies. The question remains, however, whether Security is liable for the additional tax owed by Southern and Standard as a result of the inclusion of the policyholders surplus accounts in their final computations of taxable income.