Corporate liquidating dividend

11-Dec-2019 12:49 by 2 Comments

Corporate liquidating dividend

The shareholder, who treats the fair market value of the property as received in exchange for his or her stock, also recognizes a gain (IRC section 331(a)).The critical issue for tax planning is whether the assets distributed are considered property under IRC section 336 and whether the corporation owns them.

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awyers advise CPAs to have employment and noncompete agreements in their accounting practices.

The Tax Court has held goodwill to be a vendible—and taxable—asset that can be sold with a professional practice 37 TC 39, 44 (1961)).

According to the IRS, when a corporation distributes “clients and customer-based intangibles” to its shareholders, IRC sections 331 and 336 apply; such intangibles include the corporation’s client base, client records, workpapers and goodwill (including going-concern value).

The intangible assets at issue included the corporation’s client base, client records and workpapers and goodwill (including going-concern value).

These intangibles, the IRS said, were corporate assets that had a specific value and when distributed to the shareholders in the liquidation, triggered taxable gains for both the corporation and the shareholders.

The IRS asserts that distribution of “clients and customer-based intangibles” to shareholders is taxable, but the Tax Court has held that it isn’t if a noncompete agreement between the shareholder or employee and the firm does not exist.

This apparent contradiction presents some questions to which there are no black-and-white answers.

THE IRS SAYS DISTRIBUTIONS of customer-based intangibles to shareholders are taxable.

When a firm or corporation distributes to its shareholders all of its assets, both tangible and intangible, and ceases doing business, the IRS says there is a taxable distribution of its intangible goodwill.

In the cases discussed in this article, the Tax Court did not distinguish between personal service corporations, such as CPA firms, and commercial organizations, such as an ice cream distribution company, in identifying the individual ownership of customer-based intangibles.

In planning for a liquidation of their professional practice or advising clients about the liquidation of a commercial organization, CPAs will find that the problems and the solutions are likely to be the same.

THE CRITICAL ISSUE FOR TAX PLANNING is whether the assets distributed are considered property under IRC code section 336 and whether the corporation owns them.

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