A liquidating dividend is

All of the corporation's debts must be paid before it can pay liquidating dividends.

Divide distributions in partial liquidation among that part of the stock that is redeemed in the partial liquidation.

After the basis of a block of stock is reduced to zero, you must report the part of any later distribution for that block as a capital gain.

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.

A liquidating dividend occurs when shareholders believe that the company is no longer sustainable or profitable.

Therefore, liquidating dividends are considered a return of shareholders' investments, rather than profit on them.

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.

331 for the difference between the FMV and the shareholder’s basis in the stock).

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