Liquidation is the orderly winding up of a company’s affairs.
It involves realising the company’s assets, cessation or sale of its operations, distributing the proceeds of realisation among its creditors and distributing any surplus among its shareholders.
The corporation does not recognize gain when it distributes cash to its shareholders. On the other hand, if a corporation distributes property in connection to stock redemption, this may result in corporate-level capital gain and/or ordinary income.
Also when a shareholder in exchange for cash, redeems a corporation stock, the corporation recognizes no gain. Generally a corporation will recognize capital gains when it distributes capital assets or Sec 1231 assets.
The XYZ Inc has only 7K in cash and it needs to come up with additional 5K.
The XYZ Inc offers the departing shareholder NJ peace of land to cover the 5K shortfalls. The shareholder accepts the offer and receives 4K in cash and NJ land.
A joint meeting of the creditors and shareholders must be held at the conclusion of the winding up.This difference has income tax implications to shareholders.While regular dividends are taxable, liquidating dividends are not taxable since they are merely the return of the shareholder's investments.Companies will issue IRS Form 1099-DIV, which clarifies the tax implications of the distribution.Companies will pay liquidating dividends under the following circumstances: Distributions can only be made to shareholders after the money owed to creditors has been paid.The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis (determined under section 1012 or other applicable sections of this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses)), adjusted as provided in section 1016.