Liquidating dividend taxability
When a corporation ceases its business operations, all assets owned by the company must be distributed.This process is known as liquidation and is necessary, even in cases when the corporation is being sold or converted into a different business structure.The double taxation feature inherent in C corporations plays a special role in liquidation.The liquidation of a company means that the business operations have ceased and the assets and property owned by the corporation are redistributed.
If the cash distribution is on a stock for which you have a basis, you do not have a taxable event until the distributions exceed the basis. If you have no basis, then you have either a long term or a short term gain.If the stocks are transferred instead, this will result in a capital gains tax on any appreciated value in the stocks at both the corporate and shareholder level.Many owners choose this option because the capital gains tax rate is lower than the rate applied to the sale of appreciated assets.These taxes can be significant if the corporation and shareholders own primarily intellectual property, such as a secret recipe, that had no value at the time the company was established but is now worth millions as a trade secret.The sale of a C corporation is also a taxable event for both the company and shareholders.
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A sale can be accomplished by either transferring all of the corporate assets or transferring all of the stock.