Tax treatment of liquidating distribution age play dating

The amount reported on a 1099-DIV represents the return of a shareholder’s investment.

This return can be made in more than one distribution if a shareholder purchased blocks of stock over time, as opposed to making a one-time purchase.

Corporations in the process of a complete liquidation – either to terminate the business or change its structure to a non-corporate status -- are required by law to transfer all cash and property assets back to shareholders as payment in full for the exchange of stock.

Section 331(a) of the IRS tax code says that if a shareholder is eligible to receive a cash liquidation distribution totaling 0 or more, the distribution must be reported on Form 1099-DIV.

This means that if the difference between the fair market value of the stock and its adjusted base – the price of the stock minus broker or commission fees – is zero, no tax is due on the amount.Payments received in excess of the total investment are subject to capital gains tax.Whether the amount qualifies for short or long-term capital gains depends on the trade date – the purchase date -- of the sale.In that case, the distributee shareholder is another corporation which owns at least 80 percent of the voting power and value of the liquidating entity’s stock on the date of the planned complete liquidation is adopted and all times thereafter until the receipt of the property.) **When a complete liquidation is followed by a pre-arranged transfer of all or part of its essential operating assets to a second (almost always newly-created) controlled corporation, the steps may be “collapsed” and treated as a single, unitary transaction which bears an unmistakable resemblance to a reorganization. 1.331-1(c) “…a liquidation which is followed by a transfer to another corporation of all or part of the assets of the liquidating corporation…may have the effect of…a transaction in which no loss is recognized and gain is recognized only to the extent of other property…”) In LTR 200806006, however, it is highly unlikely that, if the dissolution had caused a liquidation, such liquidation would have been “stepped together” with the reincorporation (to find a reorganization). 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.

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