Liquidating a loss corporation
After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning. "Tax Treatment of Debt Distributed to Shareholders in a Corporate Liquidation" accessed August 31, 2019.A traditional corporation, commonly referred to as a C corporation, is owned by its shareholders.And if the plan of liquidation includes the distribution of property that's worth less than the outstanding debt that a shareholder assumes responsibility for, it's treated as a taxable gain to the corporation.
The tax treatment of liquidating distributions of debt to shareholders impacts the amount of gain or loss shareholders report on their tax returns.Proceeds from a cash liquidation distribution can be either a non-taxable return of principal or a taxable distribution, depending upon whether or not the amount is more than the investors' cost basis in the stock.The proceeds can be paid in a lump sum or through a series of installments.Distributions to investors up to their cost basis—the amount invested, including commissions and fees—in the stock is considered a non-taxable return of principal.
Amounts above investors' cost basis are reported as capital gains, a taxable distribution.
When a corporation liquidates all of its assets to shareholders, it generally recognizes a taxable gain or loss, though a number of rules exist that limit a corporation's ability to report losses.