Before explaining ‘liquidation of subsidiaries’ being the scope of our study in this paper, it is highly essential that we define some of the commerce terms that are frequently used in reference to taxation of corporation/partnerships with, of course, a passing reference to the US tax system, for the purpose of clarity and easy understanding of the subject under discussion..
A corporation is the simplest form of business organization, which is created through a contract with a state. Functioning as an individual entity, separate from its owners, a corporation has the privilege of many legal rights. A corporation is a form of business that has limited liability of its owners and has absolute authority to independently issue shares of transferable stock. A corporation, therefore, is formed by a group of shareholders also called owners.
The shareholders elect a board of directors, who in turn appoint managers to run the corporation. The management sets goals for the corporation so as to provide a substantial return to its shareholders. But there are various tax implications on these corporations, which make them different from either limited partnership firms or sole proprietorship companies. (Investment Dictionary – Investopedia, 2007)
The C-corporationA C-corporation in the US is one that is formed under the state law. Also there is no requirement of election at the federal level for its creation or for its treatment as a small business corporation. But a C-corporation is liable to pay corporate income tax on its profits. The shareholders of C-corporation are equally taxed on their gains or dividends at rates that are ordinary on any income. This two-tier tax application is frequently referred to as the ‘Dual Taxation”.
Partnership is an agreement between two or more persons in a joint business venture. The partners pool their funds, skills and sources and pledge to share both profits and losses in the business. Those, looking after day-to-day management of the partnership’s activities, are called ‘General Partners’. Whereas those supplying only money and are not concerned with decisions of the management are called ‘Limited Partners’, and as their name suggests, their liability is restricted to investment alone. Partnerships can either be public or private, and therefore in more general terms partnership is a relationship of two or more people running business for mutual profit. (Financial ; Investment Dictionary, 2007)
Liquidation, an act of liquidating or state of being liquidated, in law means to turn over one’s accounts and assets to a trustee so that confirmation of one’s debts could be made officialy , and then the assets be made avaialable toward their discharge. Hence liquidation is also the second name for the termination of business and selling of the assets. The proceeds too are used to pay off creditors’ outstanding balances, and leftovers, if any, are distributed among the shareholders.
The word subsidiary, which ordinarily means contributory, auxiliary or functioning in a supporting capacity, assumes a significant importance when it is used as an economic term. A subsidiary company, therefore, is the one that is controlled by another company. Hence subsidiaries are small companies, which are part of larger companies and are owned and controlled by them. (Encarta and Free Dictionary, 2007)
The ‘taxation’ is a system of generating funds for government for use in its various services. To raise this money, governments impose tax on both businesses and people. The tax revenue so collected is used by governments to complete their diverse public projects. As the role of governments expanded in modern times, the need for tax revenue also increased. But the taxpayers, who are always averse to tax increases, advocate the frugal spending by the government in their activities and services.
The United States Constitution gave Congress the authority to levy federal taxes. Using its right, the Congress first introduced a tariff, which was the chief source of federal revenue in 1789. But due to the huge costs in World War-1 (1914-1918), the US government levied a series of additional taxes like the excise taxes.
Next a tax on individual incomes called income tax, which was levied in 1894, remained a major source of federal revenue during the1900s. Although local as well as state governments depended mainly on property taxes, a large percentage of their tax revenue came from income taxes and sales taxes in 1930s, a period of Great Depression in the US history. Then vide a historic program of ‘New Deal’ President Franklin D. Roosevelt greatly enhanced federal services to help bring economic relief to the already suffering country. The local and federal governments kept increasing their services during the times of World War II (1939-1945) with the result that the US tax system also grew proportionately so as to cope with the new federal projects.
But in the United States today it is the ‘Individual’, the ‘Corporate Income Taxes’ and the ‘Social Security Contributions’ which are the chief federal taxes, and bigger portion of the revenue collected from these taxes are used by the state and local governments for projects like public-housing and road-building. (Meade, n.d.)
Liquidation of Subsidiaries in the US HistoryInitially, the New Deal had to struggle against various holding companies and like-wise multipart corporate organizations. The administration utilized taxation tool to achieve its goals. President Roosevelt pushed the congress through his famous address of 1935, “Taxation the simplification of our corporate structures through the elimination of unnecessary holding companies in all line of business.”As a result of this assertion, voluntary simplification of such corporations began. At the time when the corporate liquidations were in progress, the existing tax law too was in force.
Therefore, due to the employment of taxation upon the total profits realized, there was hardly any inspiration for the subsidiaries to merge with parent corporations. Then the chairman of the Senate Finance Committee, Senator Harrison issued an amendment in the Revenue Act (1935) just for the purpose of creating an incentive. It was by virtue of this amendment that corporations were substantially provided with an incentive, essentially an option for the parent corporations to postpone profit or loss as a result of liquidation occurring up to 80% of the controlled subsidiaries under the assurance that their assets would be disposed-off by the parent corporation sometimes later. But in spite of the fact that inter-corporate gains were wholly taxable, and the apprehension of a failure in making such distributions, which would make corporations liable to 42½% of full tax on their total retained earnings, there was no provision of a single alike bill within the House.
Since businesses cannot be transferred to a relative, there is no option for the owner but to sell the business if he or she desires to quit. For selling the business very careful planning is required in advance. The most appropriate time for selling a business is when it is growing as a profitable concern. Before going for a sale, it is important that you take a stock of financial position and allied activities so as to determine the facts on ground and the problems if any.
It is also advisable to get an valuation of your business from an expert in order to find the true worth of your business project. The next step is getting a potential buyer located.. One of the trusted ways to locate a prospective buyer is through a business broker who can be hired for this job.
