IRS advises on corporate liquidation assessment

The IRS has issued a Chief Counsel Memorandum (AM 2022-002) discussing the assessment statute expiration date (ASED) for Form 952, Consent to Extend the Time To Assess Tax Under Section 332(b). Form 952 must be filed to receive nonrecognition treatment in a liquidation under Section 332 when using the multi-year alternative for a distribution of property.

Section 332 provides the tax treatment when a parent corporation of an 80%-or-more-owned subsidiary corporation distributes property in complete cancellation or redemption of all its stock in accordance with a plan of liquidation. If certain requirements are met, neither the parent nor subsidiary recognizes gain or loss, and the liquidation is nontaxable. Generally, the distribution of property needs to occur within one taxable year (i.e., the one-year alternative), or within three taxable years after the close of the taxable year during which it made the first liquidating distribution (i.e., the multi-year alternative). The provision is not an elective provision; if the requirements of Section 332 are met, the liquidation is nontaxable.

If a taxpayer opts for the multi-year alternative, the parent must file Form 952 for each of its taxable years that falls wholly or partly within the period of liquidation. If the parent fails to file Form 952 for all the years that fall within the period of liquidation, the IRS may deny nonrecognition treatment.

Form 952 extends the taxpayer’s period of assessment for all income tax issues that pertain to the Section 332(b) liquidation. For each taxable year for which the parent files Form 952, Form 952 extends the parent’s (but not the subsidiary’s) period of assessment for at least an additional four years. During this period, the IRS may assess tax that relates to the liquidation.

The statute of limitations is extended for four additional years after the third taxable year after (i) the due date of the parent’s return for the third taxable year beginning after the end of the taxable year of the first liquidating distribution (without extensions) or (ii) the date on which that return is filed. Note, the ASED is the same for all taxable years during which the parent received a liquidating distribution from the subsidiary and for which it filed Form 952.

If the parent has not filed its return for the third taxable year beginning after the end of the taxable year of the first liquidating distribution, the AM recommends that the IRS assume that the earliest possible date — April 15 of Year 9 — will be the ASED, until it receives the Year 4 return.

The AM generally provides best practices for IRS field examiners to review multi-year liquidations under Section 332. The AM recommends modifying the current practice of treating the taxable year for which the initial Form 952 was filed as the year of the first liquidating distribution. Prospectively, the IRS will review a subsidiary’s Form 966 and the accompanying plan of liquidation in addition to reviewing the parent’s Form 952. The IRS will also review each statement that the parent has filed with its income tax returns and events that occurred before the formal adoption of a plan of liquidation in order to determine whether Form 952 should have been filed for a taxable year before the year in which the first distribution is purportedly made.

The AM also notes that the proper individual to execute Form 952 on behalf of the parent is not always an officer of the parent. The AM also provides seven instances that may change which individual has the authority to sign Form 952 on behalf of the parent.

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