In a complete liquidation of a corporation, the corporation distributes all of its assets to its shareholders in exchange for all of its stock pursuant to a plan of complete liquidation. Under the plan, the corporation may distribute its assets to its shareholders in one distribution or a series of distributions. It is important that the corporation ceases all of its business activities following the liquidation.

The liquidating corporation generally 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.

The shareholders of the liquidating corporation also recognize gain or loss on the exchange. 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 the assets is the fair market value of those assets on the date of distribution.

There are special rules that apply when there is a series of distributions or when the liquidating corporation distributes an installment obligation. There are also special rules that apply in the case of a complete liquidation of a controlled subsidiary.

If you would like to further discuss the tax consequences of the liquidation of your corporation, please do not hesitate to call.