Start Liquidating distribution tax

Liquidating distribution tax

At issue is whether the company’s status as a corporation had been terminated by the administrative dissolution. Something else to consider is that under Section 336(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. 142 ) states that “…where a corporation ceases business operations, has retained no assets, has no income, and has actually liquidated, there is in effect a de facto dissolution, even though the corporation has not been formally dissolved…” 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.

The company was “administratively dissolved” some time after, for example, effective January 25, 2008, due to its failure to timely pay state franchise taxes.

(See Bittker and Eustice, Federal Income Taxation of Corporations and Shareholders at Para.

When a corporation decides to shut down, it might liquidate its remaining assets, and even some of its debts, to shareholders.

For example, suppose your distribution includes $10,000 in cash and a company vehicle worth $20,000 for which the corporation still owes $5,000.

In this situation, you calculate your gain or loss using $25,000 as the gross proceeds -- the cash plus the car's value minus the outstanding debt on the car.

If you own shares in a corporation that makes liquidating distributions to you, the IRS treats the transaction as a sale or exchange of your stock.

This means that you may have a gain or loss to report on your return.

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.