The Tax Treatment of Collapsible Corporations

Abstract

Section 331 (a) (1) of the Internal Revenue Code provides that a complete liquidation of a corporation is to be treated by the shareholder as a sale of his stock, which will ordinarily produce capital gain or loss, and section 334 (a) provides that the shareholders' basis for property acquired on the liquidation is its fair market value at the time of distribution. These rules, which are of long standing, led to the tax avoidance device known as the "collapsible corporation," which in its turn led, in 1950, to the enactment of what is now section 341. As will be seen, section 341 reaches a good many corporations besides those at which it was aimed; and its application is not limited either to "temporary" corporations or to corporate liquidations. Although section 341 has thus come to encompass a wide range of corporations and transactions, it can be understood best after the "collapsible corporation" itself is examined.