Liquidating distribution taxability
However, only the amount of distribution that is in excess of the recipient's original investment is taxable. THE IRS SAYS DISTRIBUTIONS of customer-based intangibles to shareholders are taxable.This means that you may have a gain or loss to report on your return.Gains and losses are calculated as the difference between your tax basis in the stock exchanged and the overall fair market value of the distribution you receive, which is treated as the gross proceeds of the deemed stock sale.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.Company management, however, was blissfully unaware of this development and continued to file the business’s federal corporate income tax return and pay all federal income taxes.
If you own shares in a corporation that makes liquidating distributions to you, the IRS treats the transaction as a sale or exchange of your stock.
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.
When you assume corporate liabilities or receive property with an outstanding debt balance, you reduce the gross proceeds by the total amount of debt included in your liquidating distribution.
For example, suppose your distribution includes ,000 in cash and a company vehicle worth ,000 for which the corporation still owes ,000.
THE QUESTION OF WHO "OWNS" the clients and customer-based intangibles turns on whether there is an employment or noncompete agreement in effect at the time the intangibles are distributed.