Liquidating vs nonliquidating distributions

The other shareholders feel that the tracts will appreciate at about the same rate, so they are willing to distribute any of the tracts. ’s shares would be redeemed, and because he is unrelated to the remaining shareholders, the redemption would qualify for stock sale (capital gain) treatment as a complete termination of a shareholder’s interest under Sec. A corporation is generally allowed to recognize tax losses when depreciated property is distributed to shareholders in complete liquidation of the corporation (Sec. cannot deduct a loss on a nonliquidating distribution of depreciated property. Conversely, if it distributes appreciated property it must recognize gain as if it had sold the property to the shareholder for its FMV. Since the corporation must compute its gains and losses on an asset-by-asset basis, to recognize a ,000 tax loss that would mostly offset the ,000 taxable gain from distributing the appreciated land.

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. 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. 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. Corporations generally report nonliquidating distributions to shareholders on Form 1099-DIV, Dividends and Distributions (Sec. 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. However, the shareholders agree that does not care which tract of land he receives in redemption of his stock because he plans to sell the land immediately. Unfortunately, a corporation cannot recognize a tax loss on a nonliquidating distribution of depreciated property (i.e., where the property’s FMV is less than the adjusted basis). Nonliquidating corporate distributions are distributions of cash and/or property by a continuing corporation to its shareholders.At the shareholder level, a nonliquidating corporate distribution can produce a variety of tax consequences, including taxable dividend treatment, capital gain or loss, or a reduction in stock basis.

At the corporate level, a nonliquidating corporate distribution can also have varying tax consequences.The distribution may have no tax effect, or it may trigger corporate-level capital gain and/or ordinary income.A type of payment made by a corporation to its shareholders during its partial or full liquidation.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.Despite the tax advantages, investors who receive liquidation dividends often find that they do not cover their initial investment.