Liquidating cash distributions taxable
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).
The non-excess distribution may comprise dividends, return of basis, and capital gains as normal.
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.
The excess distribution is subject to tax, even if it is entirely return of basis. Exactly how the tax is calculated is beyond the scope of this post, but an important item to note is that if a distribution is taxed as an excess distribution, then even return of basis, which is normally tax-exempt, is taxable.
When a shareholder realizes a gain from disposing of a PFIC share, the entire gain is taxed as excess distribution. But the way we calculate gain follows the normal rules: Gain equals amount realized minus adjusted basis. Thus, if a distribution is taxed as a sale of a PFIC, then the return of basis is not taxable. Thus, a portion of the amount realized equal to the adjusted basis (the return of basis) is not gain and is not included in income.
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.