Tax implications of liquidating a company

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Section 901(m)(3)(B)(ii) (the Statutory Disposition Rule) generally provides that the basis difference of any RFA allocated to the tax year of a disposition equals the excess of the RFA's basis difference over the RFA's aggregate basis difference that has been allocated to all prior tax years (the Unallocated Basis Difference).Section 901(m) does not define the term “disposition” for purpose of the Statutory Disposition Rule.

Notably, when a disposition occurs during the 2014 tax year, but before 21 July 2014, it is unclear how the taxpayer determines the Unallocated Basis Difference existing as of 21 July 2014.

On 21 July 2014, the IRS and the Treasury published Notice 2014-44, announcing forthcoming regulations under Section 901(m) regarding the effect of certain dispositions of a “relevant foreign asset” (an RFA) following a “covered asset acquisition” (a CCA) for purposes of Section 901(m).

The regulations will include special rules applicable to CAAs resulting from an acquisition of an interest in a partnership with a Section 754 election in effect (a Section 743(b) CAA).

In that case, however, a portion of the Unallocated Basis Difference will be taken into account in the tax year of the disposition, equal to the amount by which the disparity in the basis of the RFA for US income tax versus foreign income tax purposes (US Basis and Foreign Basis, respectively) is reduced as a result of the disposition.

The regulations will include other rules for Section 743(b) CAAs.

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