Volume 9 No 5    /    Read Article

By Daniela Shani

In general, a corporation can set off losses recognized on the sale or exchange of capital assets when determining net capital gain that is subject to U.S. tax. Where the losses arise from a liquidation of a subsidiary, not all losses realized are available to offset gains. Those related to a liquidation covered by Code §331 provide a tax benefit, while liquidations involving a subsidiary defined in Code §332 provide no benefit. While the rule under Code §332 appears to be automatic, case law in the U.S. allows a corporation to restructure its investment in a subsidiary corporation in order to break the parent-subsidiary arrangement. In essence, the choice of which section applies is elective, simply by changing facts. Daniela Shani explains U.S. case law that provide favorable tax treatment, but cautions that the Biden Administration may intend to override case law with a legislative amendment in order to pay for proposed benefits.   See more →