Tax consequences liquidating corporation

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If the corporation distributes the assets to the shareholders in kind pursuant to a plan of liquidation, it is treated as having sold the assets to the shareholder for fair market value.[15] If the corporation instead sells the assets and distributes the remaining cash to the shareholder, it is taxed on the sale.[16] Likewise, the shareholder is treated as though the shareholders sold their stock to the corporation for the value of the assets or cash received.[17] The shareholder’s basis in property received pursuant to a plan of liquidation is the fair market value of the property at the time of the distribution.[18] [10] I.

he shareholder consequences of a complete liquidation of an S corporation are governed by Secs. The dividend rules that otherwise apply to corporate distributions are not applicable to distributions in complete liquidation.

In its ruling, the IRS stated that the distribution would have been made, in the same amounts, whether or not the partnership had converted into a corporation.

The Snag After the conversion, the corporation found that it could not raise the desired capital at an acceptable cost as long as its operations included a particular business unit.

Consider a case examined by the Internal Revenue Service last year that provides insight into a useful tool for companies that expect to liquidate assets.

Accordingly, a corporation was formed based on a “plan of conversion” that transformed a partnership to a corporation.

Instead, it is treated as if incorporation had never occurred, with the felicitous result that the tax consequences that ordinarily attend a corporate liquidation (as depicted in Section 336(a) and Section 331(a), supra) are avoided.

Contributor Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for

It follows that the conversion of a corporation into a LLC is not treated as a liquidation of a corporation for purposes of determining the taxable income of a company and its equity holders.

Therefore, by restoring the status quo ante within a single taxable year, the transaction is not treated as an incorporation followed by a separate liquidation.

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