Tax implications of liquidating a corporation

A business trust is either treated as a corporation or partnership for federal income tax purposes.Since the business assets are deemed to have been distributed to the owners and then transferred to the liquidating trust, there will be an immediate recognition of a gain or loss from liquidation of the former business by the owners.However, as with new legal entities, fund managers should consult with tax advisors before embarking on a liquidating trust to make sure that this type of entity makes sense for the situation.Garth Puchert, Audit Partner of Eisner Amper's Financial Services Group, is primarily devoted to private equity funds, registered investment companies, investment advisors, mutual funds, hedge funds and broker-dealers in securities.It may take several years for such assets to be converted into cash.Such assets may consist of securities that are illiquid or have certain restrictions or monies held in escrow where it will take several years for the conditions to be met for release of such funds.

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A liquidating trust is generally considered a grantor trust for tax purposes.

However, a partner generally must recognize gain on the distribution of property (other than money) if the partner contributed appreciated property during the 7-year period before the distribution.

A partnership generally does not recognize gain or loss because of distributions it makes to partners.

Such agreement provides for trustee duties, compensation of trustees, and governance as well as distributions and other administrative matters.

The liquidating trust normally has a lower cost structure than the existing fund and is managed on an "as needed" basis by the trustee as opposed to a full-time basis for the fund.


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