Tax Treatment of Previously Expensed Assets in Corporate Liquidations

This Note argues that although the Tennessee-Carolina majority adopts overbroad language and ignores established tax principles, a more careful refinement of its theory will yield the same proper result, without, in most situations, departing from accepted principles. The proper inquiry must focus first on whether the corporation has received any benefit, and then on whether that gain should be exempted by the nonrecognition provisions of section 336, or on any other basis. Part I of this Note examines these questions from a theoretical perspective, and concludes that expensed assets remaining at the time of liquidation give rise to corporate income, and that neither their distribution nor the liquidation of the corporation serve to dissipate the gain before it is realized. Nonrecognition treatment should not, as a matter of either rational tax policy or congressional intent, be extended to previously expensed assets.

Part II focuses on the language of the Code, and offers a construction of section 336 which limits its scope to gains or losses caused by changes in the value of the assets; under this interpretation, the tax benefit conferred by the original deduction of the assets’ cost would be recognized as income, realized but not engendered by the liquidation. The available evidence of congressional intent fully supports this interpretation, and may independently justify the result defended by this Note. Finally, even if section 336 unequivocally bars recognition of the gain resulting from distribution of previously expensed assets, its application to previously expensed assets implicates the policies of section 111, the statutory tax benefit rule. The conflict between these sections should be resolved in favor of section 111, because denying nonrecognition to previously expensed assets does not contravene the policy purposes of section 336. Given that reasonable interpretations of the Code are consistent with the principles of rational tax policy articulated in Part I, the Note concludes that the courts should apply the tax benefit rule to previously expensed assets distributed in liquidation.