Editor: Uzell T. Williams-Freeman, CPA
An IRS Chief Counsel Memorandum (AM 2022-002, released Sept. 2, 2022) concluded that the IRS should not rely only on the Form 952, Consent to Extend the Time to Assess Tax Under Section 332(b), when determining the assessment statute expiration date (ASED) under Sec. 6501 for a multiyear Sec. 332 liquidation. Instead, the memo instructs the IRS to thoroughly review all the information filed by the parent and subsidiary to identify the tax year in which the first distribution was made. Given the implications for failing to properly file a Form 952, practitioners should be aware of the specific requirements laid out in the memo.
Sec. 332 liquidations
Under Sec. 332, certain liquidations are nontaxable events such that the parent recognizes neither gain nor loss if (1) the parent corporation owns 80% or more of a subsidiary; (2) the parent receives, or is deemed to receive, distributions of property from that subsidiary in complete cancellation or redemption of all of the parent’s stock in the subsidiary; and (3) the subsidiary distributes all of its property within one tax year (the one-year alternative) or within three tax years (the multiyear alternative) after the close of the tax year during which it made the first of a series of distributions.
When using the multiyear alternative, the parent must file Form 952 to waive the statute of limitation on assessment for each of its tax years that falls wholly or partly within the liquidation period. The statute-of-limitation waiver only applies to the issues pertaining to the Sec. 332(b) liquidation. If the parent does not file Form 952 for all the years that fall within the liquidation period, the IRS may deny nonrecognition treatment that otherwise would have qualified under Sec. 332.
Filing Form 952 extends the parent’s period of assessment for at least four years for each tax year for which it is filed. This extended period begins when the usual three-year limitation period expires and ends four years (on the ASED) after the later of (1) the due date of the parent’s tax return for the third tax year beginning after the end of the tax year of the first liquidating distribution (without extensions) or (2) the date on which that return is filed.
Memo clarifies ASED determination
The memo addresses the question of the proper ASED if the parent has not yet filed its return for its third tax year beginning after the end of the tax year of the first liquidating distribution. The memo says the IRS should assume that the ASED is the earliest possible date and adjust that date later if it receives information from the fourth year after the first distribution.
The memo also clarifies that the ASED is the same for all tax years during which the parent received a liquidating distribution from the subsidiary and for which it filed Form 952.
Noting that sometimes it is not clear when the subsidiary made its first distribution, the memo explains that it is the Office of Chief Counsel’s understanding that “the current practice is to treat the taxable year for which the initial Form 952 was filed as the year of the first liquidating distribution.” The memo recommends modifying that practice by thoroughly reviewing all the information filed by the parent and subsidiary to identify the tax year in which the first distribution was made. Specifically, the IRS should review: (1) Form 952; (2) Form 966, Corporate Dissolution or Liquidation; (3) when the first distribution was made; (4) each statement the parent filed with its income tax returns; and (5) the events that occurred before the liquidation plan was formally adopted. The memo also specifies who may execute Form 952 on behalf of the parent for each tax year.
Chief Counsel Memo AM 2022-002 reminds taxpayers that Sec. 332(b)(3) expressly requires filing Form 952 as a condition of receiving Sec. 332 treatment in a complete liquidation under the multiyear alternative. Again, failure to file Form 952 may result in the IRS’s denying nonrecognition treatment to a complete liquidation that would otherwise have qualified under Sec. 332.
While the memo provides a useful overview of the ASED’s mechanics when a Form 952 is filed, practitioners also would do well to consult the IRS’s Internal Revenue Manual Section 25. 188.8.131.52.3.1, Liquidation of a Subsidiary IRC Section 332 (11/17/21).
The views expressed are those of the author and are not necessarily those of Ernst & Young LLP or other members of the global EY organization.
John Dilorio, J.D., LL.M., is senior manager in EY’s National Tax Controversy Practice in Washington, D.C., and a member of the AICPA Tax Practice and Procedures Committee. For more information about this column, contact firstname.lastname@example.org.