May 17 , 2024
When a company is being liquidated, the distribution of corporate assets to shareholders through a liquidation procedure is called “a complete liquidation”. In a corporate liquidation, shareholders usually recognize a capital gains or losses.
In a "complete liquidation” of a corporation,
the corporation distributes all of its assets to its shareholders,
the assets are distributed in one or a series of distributions,
the distributions are in redemption of all of the corporation’s stock,
the distributions are made pursuant to a plan of liquidation.
Under the plan, it is important that the corporation ceases all of its business activities following the liquidation.
The Shareholders who receive distributions in a complete liquidation recognize gain or loss as if they have received full payment in exchange for their stock. Generally, the gain or loss is capital in nature; however, if the corporation fails to cease its business activities following the liquidation, the liquidating distributions may be treated as dividends that are ordinary in nature. The shareholder's basis in property received in the complete liquidation is usually the property’s fair market value.
In general, “the liquidating corporation” recognizes gain or loss on the distribution of assets to its shareholders as if it sold the assets to the shareholders at fair market value. However, note that in certain types of liquidations, the corporation’s recognition of loss may be limited or entirely disallowed.
For example, one exception to the general rule of gain or loss recognition is in the case of a complete liquidation of a subsidiary (a tax-free subsidiary liquidation). To qualify for the exception, the parent corporation must own at least 80 percent of the subsidiary stock. In addition, the liquidating distributions must be made with a three-year period from the close of the tax year in which the first of the distributions. Neither the parent corporation nor the liquidating subsidiary recognize gain or loss in the tax-free subsidiary liquidation. The parent corporation generally obtains a carryover basis in the distributed assets.
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