26 U.S.C. § 337 — Nonrecognition for property distributed to parent in complete liquidation of subsidiary

(a) In general: If a subsidiary corporation is completely liquidated into a parent that owns at least 80% of its stock (a "complete liquidation" under section 332), the subsidiary does not have to recognize any gain or loss when it hands its property over to that 80% parent (called the "80-percent distributee"). (b) What happens to debt between the subsidiary and its parent, and to tax-exempt parents: (1) If the subsidiary owed money to its 80-percent-owner parent on the date the liquidation plan was adopted, then — for purposes of this section and section 336 — any property the subsidiary transfers to the parent to pay off that debt is treated the same as a regular liquidation distribution. (2)(A) Normally, the no-gain-or-loss rule in (a) and (1) does not apply if the 80-percent distributee is a tax-exempt organization (this does not include a cooperative described in section 521). (B)(i) But that exclusion doesn't apply — meaning the no-gain-or-loss treatment is restored — if the tax-exempt organization is the kind described in section 511(a)(2), and right after getting the property, it uses that property in a business activity whose income is taxable under section 511(a) (an "unrelated business"). (ii) If the organization later sells or disposes of that property, or stops using it in the taxable business activity, then any gain it avoided earlier (up to the amount that wasn't taxed) must now be counted as taxable unrelated business income. If the organization simply stops using the property in the taxable activity, it's treated as if it disposed of the property on the day that use stopped. (c) "80-percent distributee" means only a corporation that meets the 80% stock-ownership requirement described in section 332(b). Whether a corporation counts as an 80-percent distributee is decided without regard to any consolidated tax return regulations. (d) The Secretary of the Treasury must write whatever regulations are needed to carry out the purposes of this section, as amended by subtitle D of title VI of the Tax Reform Act of 1986. That includes: (1) regulations to stop people from getting around the purpose of this rule using any law, regulation (including consolidated return rules), or by using a regulated investment company, real estate investment trust, or tax-exempt entity; and (2) regulations to properly coordinate this section with the rules on taxing foreign corporations and their shareholders.