Cash proceeds in a liquidating distribution from s-corp
Nondeductible and noncapital expenditures must reduce the S Corporation's basis, per Treas. The Tax Court applies a three-pronged test to determine whether a complete liquidation has taken place see Joseph Olmstead v.
At the corporate level, the corporation recognizes gain or loss on the liquidation in an amount equal to the difference between the fair market value and the adjusted basis of the assets distributed. In that situation, there is a deemed sale of the assets by the corporation.
Commissioner of Internal Revenue, U. If the corporation has valuable claims for which it will bring suit during this period, it has retained assets and therefore continues to exist. Some corporations adopt plans of liquidation which on the surface appear to meet the various statutory requirements for liquidations. If the S corporation is not required to report the deferred gain when it distributes the installment obligation i.
Also, a liquidation followed by reincorporation of the working assets could be a device to recognize losses. Many cash-basis corporations will have substantial accounts receivable, as in the case of professional corporations. Distributions made before there is evidence to support an intention to liquidate should be taxable as dividends ordinary income to a shareholder. Dissolution under state law or lack thereof will not be controlling for federal tax purposes. There are special rules dealing with the distribution of an installment obligation in a corporate liquidation.
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