I am sure you were wondering how a corporation dies and goes to heaven.  Now is your chance to satisfy your curiosity and find out.  The following information tells it like it is and how to do it.  See this report: HOW DO I LIQUIDATE OR DISSOLVE A CORPORATION SO THAT I PAY THE LEAST AMOUNT OF TAX?

So, you own a Corporation that is no longer needed and you want to close it down.

  • HOW DO I LIQUIDATE OR DISSOLVE A CORPORATION

  • SO THAT I PAY THE LEAST AMOUNT OF TAX?

 

 

   By Rex L. Crandell, CPA, Attorney

   The first issue to address information on reporting the liquidation from the C-Corporation’s perspective.

          When a corporation liquidates, the board of directors will vote and pass a documented corporate resolution to liquidate the corporation which will need to be confirmed in writing by the shareholders.  One person can have more than one title and should sign the documents for each title used.  For example:  #1 SHAREHOLDER, signs as a Director then   #1 SHAREHOLDER, signs as a shareholder.

      The corporation will prepare an IRS Form 966 to inform the IRS as to the upcoming liquidation.  The IRS Form 966 and related required form documentation is then filed with the IRS within thirty (30) days of the liquidation resolution.  The form filing should not wait until the C-Corporation tax returns are completed and submitted.  The IRS Form 966 should indicate that this is a complete liquidation (IRS Form 966, line 3) and that IRC§331 was the code section that the corporation will be liquidated (line 10).  See the IRS Form 966 for additional information and requirements.

        The corporation will treat the liquidation as a sale of all assets at their current Fair Market Value (hereafter referred to as FMV).  It is not permissible to report the asset transactions at their historical book values as indicated on the company’s Balance Sheet and Depreciation Schedule.  There should be a worksheet included in the corporate tax returns showing the sales transaction and the gain or loss between the FMV and book value for each asset.  Once the corporate tax returns are completed and ready to be submitted, it should include a copy of the IRS Form 966 that was already filed with the IRS.

        The transaction is taxable as a sale of assets by the C-corporation (IRS Form 1120).  The transaction is also treated as a sale of corporate stock by the shareholders IRS Form 1040.  This is the infamous double taxation that applies to C-Corporations.

   A C-Corporation distribution of retained earnings will be treated as a taxable dividend received by the shareholder.

   When a C Corporation liquidation is done by electing IRC §331 tax treatment, the payment of retained earnings to the shareholders is not considered a taxable dividend to the shareholder.  It is considered as an integral part of the presumed stock sale transaction.

   This is in contrast to an S-Corporation, because an S-Corporation’s retained earnings automatically flows through the S-Corporation to the shareholders as dividend regardless if the shareholder was paid the retained earnings in cash or if no distribution of cash took place.

  What should be the value of the Life Insurance policies?

       If you are unable to determine the FMV of assets, you can request the assistance of a professional appraiser or some other person with specialized skills to determine the current FMV.  An online search could be used to support the value of some assets.  In terms of the life insurance policies, since a willing buyer would pay at least the cash value of the policy, then the cash value would be the FMV less a nominal transaction and inconvenience fee to the hypothetical buyer.  If your insurance agent feels that the separate death benefit part of life insurance has a market value, then it should be used as the sales price.

   What should the shareholder’s basis be for the sales transaction?                    

      Shareholder basis is determined by considering the amount of money contributed to the corporation at the time the shares were acquired.  This is called outside basis in the hands of the shareholder.  This number may end up being different from the inside basis shown on the corporation’s balance sheet.  Then the evolving basis computation would include any additional funds that were contributed to the corporation or assets transferred to the corporation.  If the corporation had paid the shareholder an amount in excess of the retained earnings of the company, then it would have been considered a return of capital to reduce the stock basis.  If the shareholders have no way of calculating the shareholder’s basis, some people will end up reporting the basis on the corporation’s balance sheet as the closest reconstruction of data that is unavailable.

       The above basis calculation method is the way most stock basis computations are made.  However, if a shareholder received a stepped up basis under IRC §1014 because of the death of a spouse that was holding title in community property, then the starting point for the evolving basis computation will be the FMV of the stock as indicated on IRS Form 706 or other documentation.  From that point, increases or decreases could take place in the stock basis depending on the type of transactions discussed in “G” above.

      The shareholders will report the complete liquidation of their shares considering the transaction as a sale of stock for the value of the compensation, funds, assets received from the corporation.  The basis used for the sale cost basis will be the shareholder’s basis in the stock.

         The gain or loss of the sale of stock will then be reported on the shareholder’s annual IRS Form 1040 in the usual manner. IRS Form 1040, Schedule D after IRS Form 8949.  However, you should also consider the beneficial tax treatment under IRC §1202 Qualified Small Business Stock.  If the C-Corporation meets all of the requirements to be properly classified as Qualified Small Business stock, then you can claim the IRC §1202 exclusion of half of the gain on the sale of the shares.

      The shareholder’s individual income tax return should show a worksheet indicating how the gain or loss on the sale of the corporation was computed.  In addition, it is suggested that you also include a copy of the same IRS Form 966 that was filed by the corporation.

    DISSOLVE THE CORPORATE ENTITY WITH THE STATE OF CALIFORNIA.

   You will need to petition the state to get the formal dissolution resolved at the state of California level to avoid paying the annual $800+ minimum franchise tax and to avoid the requirement to continue to file annual corporate tax returns for federal and California.

   CONCLUSION

   A liquidation of a corporation is treated as a sale of stock.  This factor should not be ignored by the liquidating corporation or the owner/shareholders of the corporate entity.  If the corporation never issued actual stock certificates to the owners of the corporation, it does not affect the taxability of the transaction.  True ownership is the determining factor and not the tangible paper called a stock certificate.

   You should distribute all the assets and pay off all liabilities before you dissolve the corporate entity and before filing your final federal and California corporate tax returns.

  I hope I was able to address and resolve all of your questions and concerns.  If there is any additional information that is needed or any additional concerns that I have not addressed, please you’re your questions and service requests to our office for evaluation.

   Very truly yours,

   Rex L. Crandell
Rex L. Crandell

Enrolled to Represent Taxpayers before the IRS
Enrolled to practice in the United States Tax Court
The Law Office of Rex Crandell
The Office of Rex Crandell, CPA, Inc.

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Our firm provides income tax preparation and planning services for individuals, families, C Corporations, S Corporations, LLC Limited Liability Companies, Partnerships, domestic partners, for income and deductions generated in California, the United States, and assist taxpayers internationally comply with the USA income tax reporting requirements. Rex Crandell, Esq. also provides services in the area of Estate Planning, Estate Administration, Probate Procedures, Advance Healthcare Directives, Durable Powers of Attorney for Financial Management, and Advance Health Care Directives.

You can contact Rex Crandell’s offices in Walnut Creek and San Francisco, California
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Please contact our office if you have any questions.

Very truly yours,
/s/ Rex L. Crandell
Rex L. Crandell. CPA, Esq.

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