Liquidating dividend tax treatment
Corporate shareholders may prefer that the distribution be treated as a dividend, allowing the corporation to take advantage of the special dividends-received deduction under Code § 243 (which allows the dividends to only be taxed once at the corporate level).On the other hand, individual shareholders often prefer that the distribution be treated as a redemption, for three reasons: A distribution qualifies as a stock redemption only if it significantly reduces the interest of the shareholder in the corporation.This mainly occurs during voluntary liquidations of solvent corporations.AS early as 1947, our Supreme Court had already characterized the gain or loss sustained by a stockholder of a corporation as a taxable income or a deductible loss.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.This difference has income tax implications to shareholders.
The rules governing distributions from C corporations differ from the rules that apply to distributions from S corporations.
The same was reiterated in 2008 where the SC emphasized that any gain on the part of the stockholder is subject to income tax.
On the part of a liquidating corporation, no tax shall be imposed, as the transfer in liquidation is not treated as a sale.
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For instance, in the recent Court of Tax Appeals (CTA) En Banc Case (1702), the Bureau of Internal Revenue (BIR) argued that the capital gains tax is a final tax on the presumed gain from the disposition of a property in exchange for shares of stock pursuant to Section 27 (D)(5) of our tax code.