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Liquidated Corporation: tax consequences and example

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What are the tax consequences to a corporation that is liquidated? Provide an example.

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A full liquidation of a C corporation is pretty straightforward in normal circumstances. Generally cash and/or property distributed in a complete liquidation is deemed to have been sold by the corporation at fair market value (for property). Any resulting gain or loss will be recognized as a taxable event for the liquidating corporation under Code Sec 331.

Shareholders would receive a liquidating dividend sometimes called a return of capital. The individual makes his/her own determination about a capital gain or loss transaction to be reported on the individual return. The classification of long or short term will depend upon the length of time the person has held the stock.

If the ...

Solution Summary

The solution surveys the many ways that a corporation can liquidate under various code sections of the Internal Revenue Code. The area is very complex and the solution provides only a glimpse of some very difficult subject matter. The example provided is a C corporation in full liquidation. The example discloses amounts for the transaction taking property subject to debt in exchange for the stock.

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Finco is a wholly owned Finnish manufacturing subsidiary of Winco, a domestic corporation that manufactures and markets residential window products throughout the world. Winco has been Finco's sole shareholder since Finco was organized in 1990. At the end of the current year, Winco sells all of Finco's stock to an unrelated foreign buyer for $25 million. At that time, Finco had $6 million of post-1986 undistributed earnings, and $2 million of post-1986 foreign income taxes that have not yet been deemed paid by Winco. Winco's basis in Finco's stock was $5 million immediately prior to the sale.

Assume Winco's capital gain on the sale of Finco's stock is not subject to any foreign taxes, and that the U.S. corporate tax rate is 35%. What are the U.S. tax consequences of this sale for Winco?

Now assume that instead of selling the stock of Finco, Winco completely liquidates Finco, and receives property with a market value of $25 million in the transaction. As in the previous scenario, at the time of the liquidation, Finco had $6 million of accumulated earnings and profits, and $2 million of foreign income taxes that have not yet been deemed paid by Winco. Assume that Winco's basis in Finco's stock was $5 million immediately prior to the liquidation, and that the U.S. corporate tax rate is 35%. What are the U.S. tax consequences of this liquidation for Winco?

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