At issue is whether the company’s status as a corporation had been terminated by the administrative dissolution. Something else to consider is that under Section 336(a) of the tax code, a gain or loss is recognized by a liquidating corporation on the distribution of its property in complete liquidation, as if such property were sold to the distributee at its fair market value. 142 ) states that “…where a corporation ceases business operations, has retained no assets, has no income, and has actually liquidated, there is in effect a de facto dissolution, even though the corporation has not been formally dissolved…” In addition, it is entirely possible for the corporation to continue in existence even though it has been, as a matter of state law, dissolved.If it is considered terminated, the company would have been viewed as having completely liquidated, and both it and its shareholders would have experienced the tax consequences attendant to the situation. In other words, in most cases, the liquidation of a corporation commonly engenders two levels of taxation: tax will be imposed at both the corporate and distributee shareholder levels.* The De Facto Company Closure A complete liquidation is not always accompanied by a formal or legal company shutdown. Thus, unless dissolution brings about an automatic transfer of the corporation’s assets to its shareholders, the corporation, even though dissolved, continues its existence.
Despite the tax advantages, investors who receive liquidation dividends often find that they do not cover their initial investment.
When a company has more liabilities than assets, equity is negative and no liquidating distribution is made at all.
Under the general rule of §722, a partner's initial basis in his partnership interest is equal to the amount of money contributed plus the adjusted basis of any contributed property in the hands of the contributing partner, increased by the amount of gain, if any, recognized by the contributing partner under §721(b).
If the contributed property is subject to an encumbrance, §752 provides rules governing the effect of such encumbrances on the partner's adjusted basis. M., Deductions: Overview and Conceptual Aspects; BNA Tax and Accounting Portfolio 5100, Revenue Recognition: Fundamental Principles; BNA Tax and Accounting Portfolio 5101, Revenue Recognition: Product Sales and Services; BNA Tax and Accounting Portfolio 5114, Accounting for Leases: Fundamental Principles; BNA Tax and Accounting Portfolio 5117, Leases: Lessee Perspective; BNA Tax and Accounting Portfolio 5118, Leases: Lessee Perspective — Selected Topics; Author of several chapters in the Tax Practice Series and contributor to various tax publications; recipient of Distinguished Author award; Member, Tax Management U.
Further, shareholders are permitted to recover their entire basis in a block before reporting gain. More to the point, notwithstanding the dissolution and reincorporation, no new corporation is deemed to come into existence so the corporate taxpayer is not required to apply for a new Employer Identification Number.
A loss from the liquidation, garners different treatment. For that reason, it is well-settled that a liquidation can occur without a formal or legal dissolution and, now, thanks to LTR 200806006, we also know that a dissolution—which does not give rise to an automatic transfer of the dissolved corporation’s assets to its shareholders—also does not give rise to, in and of itself, a complete liquidation.
A fine line exists between definitions of a corporate liquidation and dissolution.
But for tax purposes, the defining line can make a big difference.
Witness the situation described in recent letter from the Internal Revenue Service (LTR 200806006, November 7, 2007), which addresses a seeming anomaly related to the tax code.