26 U.S.C. § 336 — Gain or loss recognized on property distributed in complete liquidation

(a) General rule. When a corporation liquidates completely and distributes its property to its shareholders, the law treats that distribution as if the corporation had sold the property to the shareholder at its fair market value. This means the corporation must recognize any gain or loss on that "sale," unless section 337 or another part of this section says otherwise. (b) Treatment of liabilities. If the distributed property comes with a debt attached, or the shareholder takes on one of the corporation's debts as part of getting the property, then for purposes of figuring gain or loss, the property's fair market value can never be treated as less than the amount of that debt. (c) Exception for liquidations which are part of a reorganization. If the liquidation is actually part of a corporate reorganization, this section doesn't apply — instead, see section 361(c)(4). (d) Limitations on recognition of loss. (1) No loss on certain distributions to related people. The liquidating corporation cannot recognize a loss on property it distributes to a related person (as section 267 defines "related") if either the distribution isn't spread proportionally among shareholders, or the property is "disqualified property." Disqualified property means property the corporation received in a tax-free transfer to capital (under section 351) or as a capital contribution, within the 5 years before the distribution — or any other property whose tax basis is figured by reference to that kind of property. (2) Special rule for certain property from carryover-basis deals. Even outside that related-person rule, if a corporation sells, trades, or distributes property it got through a section 351 transfer or capital contribution, and getting that property was part of a plan mainly meant to let the corporation claim a tax loss on it during the liquidation, the corporation must reduce that property's tax basis (down to zero, at most) by however much the basis exceeded the property's fair market value right after the corporation acquired it. Property acquired more than 2 years before the liquidation plan was adopted is not automatically treated as part of such a tax-avoidance plan, though the Secretary can write regulations covering closer cases. Instead of denying the loss outright for an earlier year, the Secretary may write rules letting the corporation's income for the year the liquidation plan was adopted be increased by the disallowed loss amount instead. (3) Special rule when section 332 applies. If a subsidiary's liquidation qualifies for the tax-free treatment in section 332 (used when an 80%-owned subsidiary liquidates into its parent), the liquidating corporation cannot recognize any loss on its distributions in that liquidation. But this loss-blocking rule only reaches distributions to the parent (the "80-percent distributee") when section 337(a) or 337(b)(1) would otherwise apply to that distribution. (e) Certain stock sales and distributions may be treated as asset transfers. Under Treasury regulations, if a corporation owns stock in another corporation that qualifies under section 1504(a)(2) (generally, an 80%-or-more-owned subsidiary) and sells, trades, or distributes all of that stock, the corporation can elect to treat the transaction as if it had instead sold all of that subsidiary's underlying assets — in which case no gain or loss is recognized on the stock sale, trade, or distribution itself.