Collapsible Corporations in a Nutshell

Abstract

Section 331(a) (1) of the Internal Revenue Code provides that a complete liquidation of a corporation is to be treated by a shareholder as a sale of his stock, and section 334(a) provides that a shareholder's basis for property acquired on a liquidation is its fair market value at the time of distribution. These long-established rules led to the tax avoidance device known as the "collapsible corporation" with which the Treasury Department has long been concerned. In 1950, Congress enacted a provision designed to deal with this form of tax avoidance, the predecessor of section 341 of the Internal Revenue Code of 1954. This article will examine the device known as the" collapsible corporation, " the manner in which section 341 has been used to prevent the conversion of ordinary income into capital gain, and the problems flowing from this provision.