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How corporations treat non-liquidating distributions from owner


A fine line exists between definitions of a corporate liquidation and dissolution. But for tax purposes, the defining line can make a big difference.

Witness the situation described in recent letter from the Internal Revenue Service LTRNovember 7,which addresses a seeming anomaly related to the tax code. The anomaly is corporate dissolution without liquidation.

Eventually, company officers learned of their plight and reincorporated the business in the same state. If it is considered terminated, the company would have been viewed as having completely liquidated, and both it and its shareholders would have experienced the tax consequences attendant to the situation.

4) Corporate Non liquidating Distributions...

However, in some cases, complete liquidation need not be accompanied by a formal or legal dissolution of the corporation. Witness the two scenarios.

In some situations, a corporation...

Conversely, the stockholders record a loss also, almost always a capital lossif the net distribution is less than their adjusted basis in the stock surrendered in the transaction.

The transaction is treated somewhat differently if a shareholder owns more than one block of stock, and receives a series of distributions in complete liquidation.

In that case, each distribution is allocated ratably among the several blocks. Further, shareholders are permitted to recover their entire basis in a block before reporting gain.

A loss from the liquidation, garners different treatment. It can be recognized only after the corporation has made its final distribution, or at least its last substantial distribution. Something else to consider is that under Section a of the tax code, a gain or loss is recognized by a liquidating corporation on the distribution of its property in complete liquidation, as if such property were sold to the distributee at its fair market value.

In other words, in most cases, the liquidation of a corporation commonly engenders two levels of taxation: A complete liquidation is not always accompanied by a formal or legal company shutdown. According to Section 1.

What is a 'Liquidating Dividend'

In addition, it is entirely possible for the corporation to continue in existence even though it has been, as a matter of state law, dissolved.

Accordingly, the continuation of "How corporations treat non-liquidating distributions from owner," after dissolution, may well depend on whether the governing state law provides that a dissolved corporation can still own assets. Indeed, in that situation, the tax consequences spelled out in Section a and Section a will not be visited on the shareholders and the corporation, respectively. More to the point, notwithstanding the dissolution and reincorporation, no new corporation is deemed to come into existence so the corporate taxpayer is not required to apply for a new Employer Identification Number.

In the instant case, the corporate taxpayer would have been unaware of the fact that it had been completely liquidated and, thus, its eventual reincorporation, in belated response to such liquidation, could not be seen as part of a unitary transaction which encompassed both the liquidation and reincorporation.

When did liquidation began and...

See in this regard William C. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment.

The Next Financial Oasis? Leave a Reply Cancel reply Your email address will not be published. excess of a shareholder's stock basis treated as capital gain. no loss can be recognized on nonliquidating corporate distributions to shareholders.

Corporate distributions of property to shareholders on their stock are taxed as dividends of all of Mark's stock ownership, the re- demption proceeds of $, qualify for.

BREAKING DOWN 'Liquidating Dividend'

Bittker, Boris I., "Corporate Dividends and Other Nonliquidating Distributions in Cash, Property. (under which corporate distributions are to be treated as " dividends" times he owned it all and retained all the incidents of ownership he had. Business owners are often concerned about how to withdraw cash from their However, a dividend distribution is generally not tax efficient allow you to withdraw cash from a corporation while avoiding dividend treatment.

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