Tax consequences of liquidating a partnership
Shareholders that do not have a strong preference on whether distributions in 2012 are taxed as dividends or capital gain/loss may prefer sale or exchange (capital) treatment in 2012 if they: Shareholders that assume corporate liabilities or receive property subject to corporate liabilities take the liabilities into account in computing their gain or loss.They do not increase their basis in the property received on liquidation because doing so would give them a double tax benefit.Instead, the liability reduces the amount realized by the shareholder.If the property distributed is worth less than the amount of the liability itself, the FMV of the property is treated as no less than the amount of the liability (Sec. The assumption of a contingent or unknown liability is disregarded in determining the property’s FMV. A corporation, whether it uses the cash or accrual basis, may have earned income that it has not collected before the liquidation takes place.But if the amount of the receivable that the shareholder ultimately collects differs from the amount that the corporation distributed, the shareholder recognizes gain or loss for the differences in the amounts reported and collected. Observation: The current reduction of the maximum tax rate on capital gains and on qualifying dividends to 15% through 2012 somewhat mitigates the traditional preference for a sale or exchange transaction (e.g., a Sec. However, under current law, distributions made after 2012 will be taxed at higher capital gain and dividend rates.A distribution is treated as one made in complete liquidation of a corporation if it is one in a series of distributions in redemption of all the stock of the corporation pursuant to a plan of liquidation (Sec. As a result, all the distributions necessary to effect a complete liquidation of a corporation do not have to take place on the same date or even in the same year. 80-177 raises the issue of the constructive receipt of assets by shareholders when a corporation adopts a plan of liquidation and the shareholders are entitled to a liquidation distribution at any time after a certain date. Therefore, taxpayers should consider making the final distribution before 2013. A shareholder may claim a loss on a series of distributions only in the year the loss is definitely sustained.
The shareholders generally recognize gain (or loss) in an amount equal to the difference between the fair market value (FMV) of the assets received (whether they are cash, other property, or both) and the adjusted basis of the stock surrendered.Then, the shareholders are treated as exchanging their stock for the FMV of the assets distributed in complete liquidation, with the resulting gains or losses at the shareholder level.When determining whether a closely held corporation should be liquidated, the tax consequences to the shareholders should be considered.If the stock is a capital asset in the hands of the shareholder, the shareholder has a capital gain or loss on the exchange.The maximum tax rate for both long-term capital gains (realized after May 5, 2003, and before 2013) and dividends (for tax years beginning after 2002 and before 2013) is 15%.