Corporate liquidation results in assets being distributed to creditors and shareholders. A liquidating dividend is used when a corporation is dissolving and it needs to distribute its assets to its shareholders. Paid after satisfying all corporate debts, the liquidating dividend is meant to provide a return on investment.
A corporation issues these dividends if it plans to terminate its business or if it plans to merge with another corporation under a new name. When a corporation decides to shut down, it liquidates its assets. This means that the business sells off not just any inventory it may have, but its tools of production, building and any other assets it may have.
The purpose of this exercise is to gain the money necessary to pay off its debts and then to distribute the remainder to its shareholders through a liquidating dividend. Often a liquidation is overseen by a receiver, or a chosen representative of the shareholders, who oversees the process to ensure that it runs smoothly and that the corporation maximizes the return from the sale of its assets.
When you receive a liquidating dividend, the amount will be reported to you on a DIV form, in either box 8 or 9. Only the amount that exceeds the taxpayer's basis in the stock is capital; this is taxed as a capital gain. The basis in the stock is how much the taxpayer paid to obtain the stock. The capital gain is treated "Liquidating dividends tax treatment" long-term or short-term depending on whether you owned the shares for longer than a year.
If you purchased the stock at different times, divide the dividends into short-term and long-term proportionally, based on when each block of stock was acquired. When one company merges with another, both sides want to avoid recognizing any gain on the transaction.
As a result, the tax code allows for tax free mergers, or reorganizations.
While there are many different types, the common thread is that in exchange for acquiring a target company's assets or stock, the acquiring company provides its stock, and sometimes cash and other "Liquidating dividends tax treatment," to the target company's shareholders.
The result is that the acquirer takes over the target and the former stockholders of the target company now become stockholders in the acquirer.
The former target stockholders get their acquirer stock from a liquidating dividend. The purpose of these types of mergers is to minimize tax repercussion, so if only stock is exchanged, no gain or loss will be recognized by either party.
The former target company stockholders transfer their basis to their new stock, and when they sell their acquiring company stock they will use that figure to calculate their taxable gain or loss.
However, if the merger is for cash and stock, the target company's stockholders must recognize gain attributed to the transaction to the extent they received cash. "Liquidating dividends tax treatment" basis would be increased by the amount of gain they were taxed on. For complex returns, consult with a tax professional, such as a certified public accountant CPA or licensed attorney, as he can best address your individual needs. Keep your tax records for at least seven years, to protect against the possibility Liquidating dividends tax treatment future audits.
John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses. Skip to main content.
Liquidation Defined When a corporation decides to shut Liquidating dividends tax treatment, it liquidates its assets. Liquidation Tax Implications When you receive a liquidating dividend, the amount will be reported to you on a DIV form, in either box 8 or 9. Tax-Free Merger When one company merges with another, both sides generally want to avoid recognizing any gain on the transaction.
Merger Tax Implications The purpose of these types of mergers is to minimize tax repercussion, so if only stock is exchanged, no gain or loss will be recognized by either party. Tips For complex returns, consult with a tax professional, such as a certified public accountant CPA or licensed attorney, as he can best address your individual needs. About the Author John Cromwell specializes in financial, legal and small business issues.
Accessed 17 November Small "Liquidating dividends tax treatment" - Chron. Depending on which text editor you're pasting into, you might have to add the italics to the site name. Past rulings by the Bureau of Internal Revenue (BIR) on the tax implications of liquidating dividends have been inconsistent. However, in. stockholders by way of liquidating dividend is not a sale subject to On the part of the stockholder, any liquidating gain shall be treated as a. dividend income cannot be used to offset capital losses; A distribution is treated as one made in complete liquidation of a corporation if it is one in a series.