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 The last substantial distribution can be used only if, at that time, the amount of the final distribution is both de minimis and determinable with “reasonable certainty.” (See in this regard Rev. Footnotes *Except in instances where the liquidation is governed by Section 332(a), and Section 337(a).

what are the tax consequences for liquidating a corproation-23

Liquidation marks the point when a corporation has committed to closing its doors.

It’s the final step in a corporate termination and the point at which IRS tax consequences start to apply.

However, in some cases, complete liquidation need not be accompanied by a formal or legal dissolution of the corporation. Complete liquidation When a corporation is completely liquidated, it transfers all of its assets to its shareholders—whether the assets are cash or property—and the shareholders assume the corporation’s remaining liabilities. According to Section 1.332-2(c) of the tax code, “…legal dissolution is not required…” What’s more, a related revenue rule (Rev. Accordingly, the continuation of existence, after dissolution, may well depend on whether the governing state law provides that a dissolved corporation can still own assets.

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.

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.

The anomaly is corporate dissolution without liquidation.

Further, shareholders are permitted to recover their entire basis in a block before reporting gain. More to the point, notwithstanding the dissolution and reincorporation, no new corporation is deemed to come into existence so the corporate taxpayer is not required to apply for a new Employer Identification Number.

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.

In that case, each distribution is allocated ratably among the several blocks. So, the ruling concludes that the dissolution and reincorporation did not result, respectively, in a distribution or transfer of the corporation’s properties.

That’s done in the same proportion that the number of shares within a block bears to the total number of shares owned by the shareholder. In addition, the dissolution and reincorporation will not affect its shareholders’ bases and holding period in its stock.

For tax purposes, the holding period begins on the day after the trade date.