Liquidating and nonliquidating distribution
The corporate-level tax consequences of a nonliquidating corporate distribution depend on whether the distribution consists of cash or property (other than cash). The form breaks total distributions down into taxable and nontaxable categories.
The corporation does not recognize gain or loss when it distributes cash to shareholders or when it redeems stock in exchange for cash payments (Sec. Avoiding Corporate-Level Gain When a corporation makes a nonliquidating distribution of corporate property other than cash (including a distribution to redeem stock), the corporation recognizes gain if the property's fair market value (FMV) exceeds its adjusted tax basis in the corporation's hands (Sec. Specifically, the corporation recognizes gain as if it had sold the appreciated property for FMV to the recipient shareholder. The portion of the corporation's gain attributable to recapture items (e.g., depreciation recapture) is ordinary income, as is gain attributable to the distribution of inventory and unrealized receivables. Form 5452, Corporate Report of Nondividend Distributions, is used to report nondividend distributions to shareholders.
There are two types of distributions from partnerships and S corps: liquidating and non-liquidating (current) distributions.
A liquidating distribution can either be a single distributing or one of many distributions that terminates the partner’s interest in the going concern.
When multiple properties are distributed, the corporation computes gain on an asset-by-asset basis (Rev. Gain attributable to capital assets and certain property used in a trade or business (Sec. Practice tip: Corporations generally report nonliquidating distributions to shareholders on Form 1099-DIV, Dividends and Distributions (Sec. Example 1: A, B, C, and D each own 2,500 shares of J Corp., a C corporation real estate development company.
A disagrees with the other shareholders and wants the corporation to redeem his stock for ,000.
A has held his stock for three years, and his stock basis is ,000. The corporation cannot afford to redeem the stock entirely for cash because its cash balance of ,000 must be used primarily to service real estate debt.
DQ #1 Liquidating and Nonliquidating Distributions Due Day 2 Wednesday ____________________________________________________________ _______________________________ Question: What is a liquidating distribution? A liquidating distribution is a single distribution, or one of a planned series of distributions, that terminates a partner’s entire interest in the partnership.
For the most part, such a distribution is made from the company's capital base, and as a return of capital, is typically not taxable for shareholders.
This distinguishes a liquidating dividend from regular dividends, which are issued from the company's operating profits or retained earnings. A liquidating dividend may be made in one or more installments. S., a corporation paying out liquidating dividends will issue to its shareholders a Form 1099-DIV showing the amount of the distribution.
Distributions from a partnership fall into two categories: liquidating distributions and nonliquidating (or current) distributions.
All other distributions, including those that substantially reduce a partner’s interest in the partnership, are governed by the nonliquidating (current) distribution rules.