Vanderbilt Law Review

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The general provision in the Internal Revenue Code pertaining to the liquidation of corporations is section 115 (c). Under this section gain or loss on a liquidation is recognized to the extent that the assets received in liquidation exceed or fail to exceed the basis of the share-holder's stock. An exception to this general rule, however, is provided by section 112(b) (6) whereby a parent may liquidate a subsidiary without recognizing any gain or loss on the liquidation if the statutory requirements are met.

The nonrecognition provision first appeared in the Revenue Act of 1935 as section 110 (a).' This original provision was unsatisfactory and was succeeded by section 112 (b) (6) of the Revenue Act of 1936 which has survived succeeding revenue acts unchanged. The purpose of the nonrecognition provision was to encourage the simplification of corporate structures by allowing corporations to liquidate their subsidiaries without paying excessive penalties in the process. The intent was not to exempt gains entirely, but merely to postpone recognition thereof until such time as they might be voluntarily realized.