Tax Practice Series Analysis
¶4600 C Corporations
	¶5010. Corporate Liquidations
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			¶5010.05 Parent-Subsidiary Liquidations
				¶5010.05.D. Tax Treatment of Liquidating...
					2. Tax-Exempt or Foreign 80% Distr...
2. Tax-Exempt or Foreign 80% Distributees
The liquidating corporation recognizes gain on property distributed to an 80% distributee that is a tax-exempt organization (other than a farmers' cooperative), unless the property is used by the distributee in an activity the income from which is subject to the tax on unrelated trade or business income immediately after the  distribution.154 Absent this provision, a distribution of appreciated property to an exempt organization could eliminate the tax on built-in appreciation, because the tax-exempt entity would not be subject to tax upon its disposition of the property.
154 §337(b)(2);  Regs. §1.337(d)-4(a)(1). But see PLR 200404058 (If the liquidating subsidiary is also tax exempt, it recognizes no gain or loss on distribution to tax-exempt 80% distributee).
For this purpose, a corporation that changes from a taxable to a tax-exempt entity is treated like a liquidating corporation and, therefore, must recognize gain or loss  at the time of the change.154.1 However, the recognition rule does not apply to a corporation that is tax-exempt  within three years of the end of the taxable year in which it was formed.154.2
154.1Regs. §1.337(d)-4(a)(2).  But see  PLRs 200333008, 199906017, and 9825013  (Conversion of a taxable corporation to a tax-exempt corporation before the  effective date (1/28/99) of former Prop. Regs. §1.337(d)-4 did not result  in the recognition of gain or loss).
154.2 Regs. §1.337(d)-4(a)(3)(i)(C). See PLR 200323028 (Corporation's  change from taxable to tax-exempt entity is nonrecognition event if entity applies for, and  obtains, recognition of exemption within three years of end of taxable year in which it was formed).
An exempt organization generally is subject to tax on its unrelated business taxable income, which includes gain from the disposition of property used in a trade or business unrelated to its exempt  purposes.155 It must recognize gain with respect to the distributed property when it either disposes of the property or no longer uses it in an unrelated trade or  business.156 The tax is imposed on the lesser of (a) the built-in gain at the time of liquidation or (b) the gain realized on disposition or the built-in gain at the time the property ceases to be used in an unrelated trade or business, whichever is  applicable.157 The recognized gain is included in the exempt organization's unrelated business taxable income.
155 §§511-515.
156 §337(b)(2); Regs. §1.337(d)-4(b)(1).
157 Id.
The liquidating corporation must also recognize gain on property distributed to an 80% distributee that is a foreign corporation, except as provided by  regulations.158 Nonrecognition should be permitted when the property will not leave the taxing jurisdiction of the United States before the recognition of gain or  loss.159
158 §367(e)(2).
159 Conference Report at II-202.