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II. De Facto Liquidation
Applying the three-pronged test of Estate of Maguire v.
Commissioner, 50 T.C. 130, 140 (1968): (1) Whether there is a
manifest intention to liquidate; (2) whether there is a
continuing purpose to terminate corporate affairs; and (3)
whether the activities of the corporation and its shareholders
are directed toward that objective, we are convinced that WSAI
and its shareholders displayed a manifest intention to liquidate
and continuing purpose to terminate corporate affairs, and that
the activities of WSAI and its shareholders were directed to that
end. See Olmsted v. Commissioner, T.C. Memo. 1984-381.
Neither the Code nor the regulations to section 331 define
the term “complete liquidation.” However, as we noted in Olmsted
v. Commissioner, T.C. Memo. 1984-381, the regulations under
section 332 (governing subsidiary liquidations) contain a
definition of “complete liquidation” under section 332 that
applies equally to section 331:
A status of liquidation exists when the corporation
ceases to be a going concern and its activities are
merely for the purpose of winding up its affairs,
paying its debts and distributing any remaining balance
to its shareholders. A liquidation may be completed
prior to the actual dissolution of the liquidating
corporation. However, legal dissolution of the
corporation is not required. Nor will the mere
retention of a nominal amount of assets for the sole
purpose of preserving the corporation’s legal existence
disqualify the transaction. [Sec. 1.332-2(c), Income
Tax Regs.]
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