§346 — Definition and special rule
38 citing cases
Statute Text — 26 U.S.C. §346
For purposes of this subchapter, a distribution shall be treated as in complete liquidation of a corporation if the distribution is one of a series of distributions in redemption of all of the stock of the corporation pursuant to a plan.
The Secretary shall prescribe such regulations as may be necessary to ensure that the purposes of subsections (a) and (b) of section 222 of the Tax Equity and Fiscal Responsibility Act of 1982 (which repeal the special tax treatment for partial liquidations) may not be circumvented through the use of section 355, 351, or any other provision of law or regulations (including the consolidated return regulations).
Treasury Regulations
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Treas. Reg. §1.346-1Partial liquidation
(a) General. This section defines a partial liquidation. If amounts are distributed in partial liquidation such amounts are treated under section 331(a)(2) as received in part or full payment in exchange for the stock. A distribution is treated as in partial liquidation of a corporation if:
(1) The distribution is one of a series of distributions in redemption of all of the stock of the corporation pursuant to a plan of complete liquidation, or
(2) The distribution:
(i) Is not essentially equivalent to a dividend,
(ii) Is in redemption of a part of the stock of the corporation pursuant to a plan, and
(iii) Occurs within the taxable year in which the plan is adopted or within the succeeding taxable year.
An example of a distribution which will qualify as a partial liquidation under subparagraph (2) of this paragraph and section 346(a) is a distribution resulting from a genuine contraction of the corporate business such as the distribution of unused insurance proceeds recovered as a result of a fire which destroyed part of the business causing a cessation of a part of its activities. On the other hand, the distribution of funds attributable to a reserve for an expansion program which has been abandoned does not qualify as a partial liquidation within the meaning of section 346(a). A distribution to which section 355 applies (or so much of section 356 as relates to section 355) is not a distribution in partial liquidation within the meaning of section 346(a).
(b) Special requirements on termination of business. A distribution which occurs within the taxable year in which the plan is adopted or within the succeeding taxable year and which meets the requirements of subsection (b) of section 346 falls within paragraph (a)(2) of this section and within section 346(a)(2). The requirements which a distribution must meet to fall within subsection (b) of section 346 are:
(1) Such distribution is attributable to the corporation's ceasing to conduct, or consists of assets of, a trade or business which has been actively conducted throughout the five-year period immediately before the distribution, which trade or business was not acquired by the corporation within such period in a transaction in which gain or loss was recognized in whole or in part, and
(2) Immediately after such distribution by the corporation it is actively engaged in the conduct of a trade or business, which trade or business was actively conducted throughout the five-year period ending on the date of such distribution and was not acquired by the corporation within such period in a transaction in which gain or loss was recognized in whole or in part.
A distribution shall be treated as having been made in partial liquidation pursuant to section 346(b) if it consists of the proceeds of the sale of the assets of a trade or business which has been actively conducted for the five-year period and has been terminated, or if it is a distribution in kind of the assets of such a business, or if it is a distribution in kind of some of the assets of such a business and of the proceeds of the sale of the remainder of the assets of such a business. In general, a distribution which will qualify under section 346(b) may consist of, but is not limited to:
(i) Assets (other than inventory or property described in subdivision (ii) of this subparagraph) used in the trade or business throughout the five-year period immediately before the distribution (for this purpose an asset shall be considered used in the trade or business during the period of time the asset which it replaced was so used), or
(ii) Proceeds from the sale of assets described in subdivision (i) of this subparagraph, and, in addition,
(iii) The inventory of such trade or business or property held primarily for sale to customers in the ordinary course of business, if:
(a) The items constituting such inventory or such property were substantially similar to the items constituting such inventory or property during the five-year period immediately before the distribution, and
(b) The quantity of such items on the date of distribution was not substantially in excess of the quantity of similar items regularly on hand in the conduct of such business during such five-year period, or
(iv) Proceeds from the sale of inventory or property described in subdivision (iii) of this subparagraph, if such inventory or property is sold in bulk in the course of termination of such trade or business and if with respect to such inventory the conditions of subdivision (iii)(a) and (b) of this subparagraph would have been met had such inventory or property been distributed on the date of such sale.
(c) Active conduct of a trade or business. For the purpose of section 346(b)(1), a corporation shall be deemed to have actively conducted a trade or business immediately before the distribution, if:
(1) In the case of a business the assets of which have been distributed in kind, the business was operated by such corporation until the date of distribution, or
(2) In the case of a business the proceeds of the sale of the assets of which are distributed, such business was actively conducted until the date of sale and the proceeds of such sale were distributed as soon thereafter as reasonably possible.
The term active conduct of a trade or business shall have the same meaning in this section as in paragraph (c) of § 1.355-1.
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Treas. Reg. §1.346-1(a)§1.346-1(a)
The items constituting such inventory or such property were substantially similar to the items constituting such inventory or property during the five-year period immediately before the distribution, and
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Treas. Reg. §1.346-1(b)§1.346-1(b)
The quantity of such items on the date of distribution was not substantially in excess of the quantity of similar items regularly on hand in the conduct of such business during such five-year period, or
(iv) Proceeds from the sale of inventory or property described in subdivision (iii) of this subparagraph, if such inventory or property is sold in bulk in the course of termination of such trade or business and if with respect to such inventory the conditions of subdivision (iii)(a) and (b) of this subparagraph would have been met had such inventory or property been distributed on the date of such sale.
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Treas. Reg. §1.346-1(c)Active conduct of a trade or business.
Active conduct of a trade or business. For the purpose of section 346(b)(1), a corporation shall be deemed to have actively conducted a trade or business immediately before the distribution, if:
(1) In the case of a business the assets of which have been distributed in kind, the business was operated by such corporation until the date of distribution, or
(2) In the case of a business the proceeds of the sale of the assets of which are distributed, such business was actively conducted until the date of sale and the proceeds of such sale were distributed as soon thereafter as reasonably possible.
The term active conduct of a trade or business shall have the same meaning in this section as in paragraph (c) of § 1.355-1.
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Treas. Reg. §1.346-1(i)§1.346-1(i)
Assets (other than inventory or property described in subdivision (ii) of this subparagraph) used in the trade or business throughout the five-year period immediately before the distribution (for this purpose an asset shall be considered used in the trade or business during the period of time the asset which it replaced was so used), or
(ii) Proceeds from the sale of assets described in subdivision (i) of this subparagraph, and, in addition,
(iii) The inventory of such trade or business or property held primarily for sale to customers in the ordinary course of business, if:
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Treas. Reg. §1.346-2Treatment of certain redemptions
If a distribution in a redemption of stock qualifies as a distribution in part or full payment in exchange for the stock under both section 302(a) and this section, then only this section shall be applicable. None of the limitations of section 302 shall be applicable to such redemption.
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Treas. Reg. §1.346-3Effect of certain sales
The determination of whether assets sold in connection with a partial liquidation are sold by the distributing corporation or by the shareholder is a question of fact to be determined under the facts and circumstances of each case.
38 Citing Cases
Unlike situations 1 and 2, situation 3 does not involve a sec. 332 liquidation entailing a carryover of tax attributes under sec. 381. See also Rev. Rul. 79-184, 1979-1 C.B. 143, involving a parent’s sale of the stock of its wholly owned subsidiary followed by a distribution (pro rata) of the sales proceeds to the shareholders of the parent in partial redemption of their stock. Analogizing the facts of that ruling to the facts of situation 3 of Rev. Rul. 75-223, Rev. Rul. 79-184, 1979-1 C.B. at
However, all of those cases either began as chapter 7 liquidations or were converted from - 21 - chapter 11 reorganizations to chapter 7 liquidations and are thus distinguishable from the current case. In addition, the question of whether a “termination” occurred before the closing of the estate was not squarely presented in any of those cases. Section 346(i)(2) of the Bankruptcy Code, like section 1398, provides for the succession of tax attributes from the estate to the debtor in cases under
Under former section 346, a distribution in partial redemption of the stock of a corporation is considered to be made in partial liquidation of the corporation if the distribution is on account of “the [distributing] corporation’s ceasing to conduct, or consists of the assets of, a trade or business * * * [actively conducted throughout the prior 5-year period a
- 9 - We hold that a bankruptcy petition filed by an S corporation does not cause the corporation to cease being a “small business corporation” or otherwise terminate its status as an S corporation.
346(i)(2) (1976); see also Firsdon v. United States, 95 F.3d 444, 446 (6th Cir. - 22 - 1996); McGuril v. Commissioner, T.C. Memo. 1999-21; Beery v. Commissioner, T.C. Memo. 1996-464, we hold that he was not entitled to claim personally in the subject years a deduction for an NOL that arose prior to the estate’s commencement; see sec. 1398(g);
346(i)(2) (1976); see also Firsdon v. United States, 95 F.3d 444, 446 (6th Cir. - 22 - 1996); McGuril v. Commissioner, T.C. Memo. 1999-21; Beery v. Commissioner, T.C. Memo. 1996-464, we hold that he was not entitled to claim personally in the subject years a deduction for an NOL that arose prior to the estate’s commencement; see sec. 1398(g);
346(i)(2) (1978); see also Firsdon v. United States, 95 F.3d 444, 446 (6th Cir. 1996), affg. 75 AFTR 2d 95-528, 95-1 USTC par. 50,040 (N.D. Ohio 1994); Beery v. Commissioner, T.C. Memo. 1996- 464. The debtor is then free to use the net operating loss as a carryover, sec. 1398(i), or carryback, as long as the net operating loss arose before the
Held, further, the interest on the deficiency amounts eliminated by the carryback from 1981 stops accruing as of the end of 1981, and the interest on the deficiency amount eliminated by the carryback from 1982 stops accruing as of the due date of the 1982 return. Cf. sec. 6611(g) (now sec. 6611(f)(2)), I.R.C. 1954, prior to and after the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, sec. 346(c), 96 Stat. 637. Joel V. Williamson, Wayne S. Kaplan, Thomas L. Kittle-Kamp, Marjori
172(b)(1) provides that an NOL for any taxable year shall be carried back to each of the 3 taxable years preceding the loss year.
346 (a) "not extreme y well-drafted" but clear enough to make subsectio applicable "only to State a loca la United States, _ . __ We hold that the period applicable to the äarrying forward of petitioners' 1975-NOL expired on-December 31, 1980, and was not affected or suspended by.petitioner's bankruptcy proceeding. Petitioners argue that respo