Effects of liquidation on the liquidating corporation
recognizes no gain or loss on Block 2 (,000 – ,000 basis) and has a remaining basis of ,000 in Block 2.
The 2008 distribution is allocated ,000 to Block 1 (10 ÷ 30 × 5,000) and ,000 to Block 2 (20 ÷ 30 × 5,000).
The shareholder’s adjusted basis in the stock is subtracted from the cash and fair market value (FMV) of other property received from the corporation. The general rule is that a shareholder’s stock basis is determined as of the end of the S corporation’s tax year. If the shareholder has different bases in different blocks of stock, the computation of gain or loss depends on whether there is a single distribution or a series of liquidating distributions (Rev. receives ,000 in 2007 and an additional 5,000 in 2008, each distribution is allocated ratably between the blocks based on the number of shares in each block.
If the shareholder assumes known corporate liabilities or receives corporate property subject to a liability (such as the distribution of mortgaged land), the amount realized is reduced by the amount of the liability (Ford, 311 F2d 951 (Ct. It appears that the adjusted basis of stock held in a liquidating corporation is adjusted for current-year passthrough items prior to determination of gain or loss from the receipt of the liquidating distributions (see Regs. The 2007 distribution is allocated the same as before.
But for tax purposes, the defining line can make a big difference.The Internal Revenue Code uses four tests to make this distinction: To prevent gamesmanship among related parties, Congress has added another layer of rules that must be analyzed to determine if a distribution is a redemption.These attribution rules provide that shares owned by a shareholder’s parents, children, and grandchildren (but not siblings) are considered to be owned by the shareholder. Similarly, shares held by corporations, trusts, and partnerships are deemed to be owned by their shareholders beneficiaries, and partners, and vice versa. As a result, shares held by these family members and entities are considered to be owned by the shareholder for purposes of determining whether the distribution qualifies as a redemption.If there is a surplus after all the company assets have been dealt with and the debts and liquidation expenses have been paid, then it will be distributed back to the shareholders.A guarantor is someone who agrees to repay the debt of a company or person if they default.