What is liquidating stock

If the property distributed is worth less than the amount of the liability itself, the FMV of the property is treated as no less than the amount of the liability (Sec. The assumption of a contingent or unknown liability is disregarded in determining the property’s FMV. A corporation, whether it uses the cash or accrual basis, may have earned income that it has not collected before the liquidation takes place.

However, the IRS has stated that a shareholder that assumes such a liability will receive capital loss treatment when the liability is ultimately paid by the shareholder (Rev. The corporation recognizes gain or loss for the receivable when it distributes the receivable to the shareholder.

When determining whether a closely held corporation should be liquidated, the tax consequences to the shareholders should be considered.

If the stock is a capital asset in the hands of the shareholder, the shareholder has a capital gain or loss on the exchange.

Liquidate is also a term used in bankruptcy procedures in which an entity chooses or is forced by a legal judgment or contract to turn assets into a "liquid" form (cash). In the investments arena, liquidation occurs when an investor decides to close out his or her position in a particular asset or security.

An investor that is long a stock may decide to sell some or all of the shares held in his portfolio for cash.

Observation: Distributions in partial liquidation of a corporation must be made in the year the plan is adopted or in the subsequent year. The liquidation should be completed as quickly as possible to ensure sale or exchange treatment (as opposed to possible dividend treatment if the corporation has E&P) for the liquidating distributions. Finally, it may be desirable to avoid a lengthy liquidation period to minimize exposure to double taxation and to avoid Sec. When a shareholder holds several blocks of the same class of stock (acquired at different times and at different prices) and several distributions are made in complete liquidation, each distribution is allocated among the different blocks in proportion to the number of shares in each block (Rev. Generally, a loss cannot be recognized until the tax year in which the final distribution is received. The normal period for assessment of tax is three years from the date the return is filed.

It had filed for Chapter 11 bankruptcy on September 23, 2010.

for reorganization under Chapter 11 was converted to Chapter 7.

On July 16, 2013, the voluntary petition of BB Liquidating Inc.

331, a liquidating distribution is considered to be full payment in exchange for the shareholder’s stock, rather than a dividend distribution, to the extent of the corporation’s earnings and profits (E&P).

Leave a Reply