S corp liquidating distributions
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).
Conversely, the stockholders record a loss (also, almost always a capital loss), if the net distribution is less than their adjusted basis in the stock surrendered in the transaction. Indeed, in that situation, the tax consequences spelled out in ( Section 331(a) and Section 336(a) will not be visited on the shareholders and the corporation, respectively.** Federal Law Governs The ruling concludes that the “core test of corporate existence,” for purposes of federal income taxation, is always, a matter of federal law.
The transaction is treated somewhat differently if a shareholder owns more than one block of stock, and receives a series of distributions in complete liquidation. To be sure, since the state law in the IRS example brought about an automatic transfer (to its shareholders) of a dissolved corporation’s assets, it followed that the company’s dissolution did not give rise to a complete liquidation.
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.
A fine line exists between definitions of a corporate liquidation and dissolution.
But for tax purposes, the defining line can make a big difference.
We are an S Corporation with a fiscal year end of September 30th.In the ruling, a corporate taxpayer had been incorporated in a state on a particular date, let’s say January 19, 2007.The company was “administratively dissolved” some time after, for example, effective January 25, 2008, due to its failure to timely pay state franchise taxes.Finding out that an S election has been inadvertently terminated because one of the many S corporation qualification rules has been violated can cause serious problems, especially when the business is about to be sold.One qualification rule is that an S corporation can only have one class of stock, although voting and nonvoting stock is permitted.