Tax treatment of liquidating distribution

05-Feb-2018 08:38

This mainly occurs during voluntary liquidations of solvent corporations.Section 301 (relating to effects on shareholder of distributions of property) shall not apply to any distribution of property (other than a distribution referred to in paragraph (2)(B) of section 316(b)) in complete liquidation. The tax treatment of the shareholders is governed by the tax code’s Section 331(a), which provides that amounts distributed in complete liquidation, “shall be treated as in full payment in exchange for the stock.” Generally, stockholders record a gain (usually capital in nature), if the net distributions of the surrendered stock is greater than the shareholder’s adjusted basis in the stock. If state law allows a dissolved company to own assets, the dissolution, unless accompanied by an actual conveyance of the entity’s assets to its shareholders, will not give rise to a liquidation.Conversely, the stockholders record a loss (also, almost always a capital loss), if the net distribution is less than their adjusted basis in the stock surrendered in the transaction. Indeed, in that situation, the tax consequences spelled out in ( Section 331(a) and Section 336(a) will not be visited on the shareholders and the corporation, respectively.** Federal Law Governs The ruling concludes that the “core test of corporate existence,” for purposes of federal income taxation, is always, a matter of federal law.Such a transaction is popularly known as a liquidation/reincorporation. 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. (See Bittker and Eustice, Federal Income Taxation of Corporations and Shareholders at Para. A loss from the liquidation, garners different treatment. For that reason, it is well-settled that a liquidation can occur without a formal or legal dissolution and, now, thanks to LTR 200806006, we also know that a dissolution—which does not give rise to an automatic transfer of the dissolved corporation’s assets to its shareholders—also does not give rise to, in and of itself, a complete liquidation.It can be recognized only after the corporation has made its final distribution, or at least its last substantial distribution. Contributor Robert Willens, founder and principle of Robert Willens LLC, writes a regular tax column for

(g)(3) of this section the amendments made by section 225 of Pub. 88–272 do not apply if there is a complete liquidation of such corporation and if the distribution of all the property under such liquidation occurs before Written determinations for this section These documents, sometimes referred to as "Private Letter Rulings", are taken from the IRS Written Determinations page; the IRS also publishes a fuller explanation of what they are and what they mean. It appears that the IRS updates their listing every Friday.But for tax purposes, the defining line can make a big difference.Witness the situation described in recent letter from the Internal Revenue Service (LTR 200806006, November 7, 2007), which addresses a seeming anomaly related to the tax code.Creditors are always senior to shareholders in receiving the corporation's assets upon winding up.However, in case all debts to creditors have been fully satisfied, there is a surplus left to divide among equity-holders.

(g)(3) of this section the amendments made by section 225 of Pub. 88–272 do not apply if there is a complete liquidation of such corporation and if the distribution of all the property under such liquidation occurs before Written determinations for this section These documents, sometimes referred to as "Private Letter Rulings", are taken from the IRS Written Determinations page; the IRS also publishes a fuller explanation of what they are and what they mean. It appears that the IRS updates their listing every Friday.But for tax purposes, the defining line can make a big difference.Witness the situation described in recent letter from the Internal Revenue Service (LTR 200806006, November 7, 2007), which addresses a seeming anomaly related to the tax code.Creditors are always senior to shareholders in receiving the corporation's assets upon winding up.However, in case all debts to creditors have been fully satisfied, there is a surplus left to divide among equity-holders.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. To be sure, since the state law in the IRS example brought about an automatic transfer (to its shareholders) of a dissolved corporation’s assets, it followed that the company’s dissolution did not give rise to a complete liquidation.