 Hello and welcome to this session. This is Professor Farhad and this session we're going to keep working with complete corporate liquidation. Specifically, we're going to be discussing distribution to minority shareholders or minority interests. This topic is covered in corporate income tax course, the CPA exam regulation section. As always, I would like to remind you to connect with me on LinkedIn. YouTube is where you would need to subscribe. I have over 1500 plus accounting, auditing and tax lectures. If you like my lectures, please share them, like them, put them in playlists, let the world know about them. If you're benefiting from my lectures, it means someone else might benefit as well. This is my Instagram account, this is my Facebook account and this is my website. On my website, I do have a donation button if you'd like to support the channel. We're going to keep looking at the four exceptions to the general rule when when a corporation liquidate and the and the rules are you cannot recognize a loss if it's a related party loss. You cannot recognize a loss if it's a built-in loss. We call those the anti-stuffing rule. We discussed those in the prior session. We looked at the distribution between a corporation and subsidiary. We talked about this and in this last session, we look at the subsidiary's corporation when it does not recognize loss on liquidating distribution to its minority shareholders. Now, first thing we want to know is who are the minority shareholders? That's important because who are these, who's that group? Well, think about it. When we own a company, well, if you own 5%, you are considered a minority shareholder. If you own 10%, so what is the cutoff? The cutoff is 80%. If you own the majority shareholder own 80% and the 20% that's left is for the minority shareholders. So you are looking at this 20%. These are the minority shareholders. The people that don't have really a saying in the company, that's what they call the minority shareholders. When we do a distribution to a minority shareholder, it's treated exactly as a non-liquidating distribution. What does that mean if it's a non-liquidating? Well, if it's a non-liquidating, we would recognize the gain, but not the loss. So if we have a gain, we always can recognize the gain, but we don't recognize the loss for the corporation. This is for the corporation. For the shareholder, the shareholder would recognize a gain or a loss. And how do we compute the gain or the loss? Hopefully, we know this by now. We look at the fair market value of property received. We deduct any debt. I always don't mention this, but we deduct any debt, if any, against that property minus our basis to determine the gain or the loss. So let's take a look at this example. The stock of 10 corporation, this is the company, is held by M corporation, 80% and Arethia 20%. So we have this corporation called 10. 80% is by M corporation, 80% is by M corporation, and 20% of it is held by an individual. The corporation is liquidated pursuing a plan adopted earlier during the year. At the time of its liquidation, the company has assets with a basis of 100,000 fair market value of half a million. And 10 corporation distribute the property on a pro rata basis. Pro rata means they gave 80% to M and 20% to A. So we have a $500,000 property. The basis is 100,000. So we have a realized gain of 400,000. Now, what's going to happen? Some of that gain, it's going to be go to M, 80% of it to M, and 20% of it to A. Well, what's 20% of that? 20% of that times 20%, it's going to give us $80,000. So the amount that goes to the minority interests to the individual is 80,000. Now, obviously, because there are tax consequences, the corporation will have to pay taxes on this. Because of the corporate tax due in this liquidation, the amount most likely will be deducted from the 100,000 because they're distributing 100,000. Because remember, they're going to be distributing of the 500,000, 100,000 to the minority interests, which is 20% and 400,000 to the master corporation, which is the controlling interests of the company. Now, of this amount, 80,000 is gain, then most probably they will deduct the taxes because they have to pay the taxes on that gain. They will deduct the taxes. Now, of this amount of the 400,000, 320 is a gain, but none is taxable. None is taxable. Why? Because it's apparent subsidiary. The relationship between TAN and master corporation, the 80% owner, it's apparent subsidiary. The relationship between TAN and that individual that owned 20%, it's technically an outsider. Basically, they are dealing with an outside party. So that's why the transaction is taxable. Now, also, for that individual, Erythia, they will have tax consequences too. They have to determine what's their basis in the stock, what's the gain and pay taxes on that. So the corporation pay taxes on the gain, and they will have to pay taxes on the gain, of course. Let's look at this example. The stock of Q company is held 85% by pheasant and by a corporation and 15% by G in individual. Q corporation is liquidated in December of the current year, pursuing a plan adopted earlier in the year. At the time of the liquidation, Q corporation has assets of 700,000, fair market value of a million, and the assets are distributed on a pro-rata basis to pheasant NG to the corporation. They're going to get 85%, and to the individual, they're going to get 15%. The individual is the minority here. Compute, recognize, gain, or loss on the distribution to pheasant. Pheasant is 85%. What's the gain or the loss on pheasant? Hopefully, you know the answer, none. There's a gain, but we don't recognize the gain. Compute now, the recognized gain or loss on the distribution of property to Giselle. Well, first of all, what's the gain? Let's figure out the gain. Well, we have a million dollar, a fair market value minus the basis, 730. The total gain is 270,000. Now, this gain will be multiplied by 15% because that interest is 15% of that individual. Therefore, the gain is 40,500. This is the realized and because the question is how much is recognized and recognized and recognized gain. So, the 40,500 is the realized and the recognized gain. Therefore, the company will have to pay taxes on that gain. And obviously, the individual will have to pay taxes based on their basis, which we don't know what their basis are, but they'll have to pay taxes. So, both will have to pay taxes. Giselle as Q as well as Q corporation on the gain. If you have any questions, any comments about this topic, please email me. 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