Effects of liquidation on the liquidating corporation

The rules governing distributions from C corporations differ from the rules that apply to distributions from S corporations.

To the extent that a distribution is made from the corporation’s earnings and profits, it is taxed to the shareholder as a dividend.[1] The portion of the distribution that is not considered a dividend is applied first to reduce the shareholder’s basis in the corporation’s stock.[2] Any remaining portion is treated as gain from the sale or exchange of property (capital gain).[3] Important Note: If a shareholder assumes a liability or takes property subject to a liability, the amount of the distribution is reduced by the amount of the liability.[4] Special rules also apply at the corporate level.[5] Special rules apply to distributions to a shareholder in exchange for the shareholder’s stock (redemptions).

If the corporation distributes property that has depreciated (i.e., property with a built-in loss), Code § 311(b) does not apply.

Instead, the distribution is governed by the general nonrecognition rule of Code § 311(a), which prevent the corporation from recognizing loss on a transfer of depreciated property. § 302(b)(1), this test is usually used only when the safe harbors of I.

A corporation will not recognize any gain or loss on a distribution of cash to its shareholders.[13] But if the corporation distributes appreciated property, the corporation must recognize gain as if the property were sold to the shareholder at fair market value.[14] Important Note: These two rules operate as a loss disallowance system.A broker may forcibly liquidate a trader’s positions if the trader’s portfolio has fallen below the margin requirement or she has demonstrated a reckless approach to risk-taking.The primary difference between C corporations and S corporations is that C corporations are taxed twice on earned income: : once at the corporate level when the income is earned, and again at the shareholder level when the income is distributed.If the corporation distributes appreciated property, the corporation is taxed on the gain under Code § 311(b).But that section only covers gain on distributions of appreciated property. If the corporation distributes the assets to the shareholders in kind pursuant to a plan of liquidation, it is treated as having sold the assets to the shareholder for fair market value.[15] If the corporation instead sells the assets and distributes the remaining cash to the shareholder, it is taxed on the sale.[16] Likewise, the shareholder is treated as though the shareholders sold their stock to the corporation for the value of the assets or cash received.[17] The shareholder’s basis in property received pursuant to a plan of liquidation is the fair market value of the property at the time of the distribution.[18] [10] I.


Leave a Reply