Liquidating a loss corporation

Liquidating a loss corporation

Gain or loss associated with the liquidating sale is accounted for at the corporate level.A recent trend with certain S corporations is the conversion of these corporations to a single member LLC or an LLC taxable as a partnership.The new entity then continues the business of the S corporation.Upon the complete liquidation of an S corporation, the S corporation recognizes gain or loss on the distribution of property to its shareholders as if it sold that property for its fair market value.To the extent any of the property is subject to a liability or a shareholder assumes a liability of the liquidating corporation, fair market value is presumed to be not less than the amount of the outstanding liability.

C corporation rules provide that amounts received by a shareholder in a distribution in complete liquidation of a corporation are treated as full payment in exchange for the stock.Generally, the rules relating to corporate distributions of property being treated as a dividend do not apply to any distribution of property by an S corporation in complete liquidation.In CCM 201237017, the Office of Chief Counsel was asked whether, in such situations, an S shareholder can increase stock basis upon the distribution of encumbered assets to the shareholder.According to the Chief Counsel's Office, while the liabilities associated with the distributed assets are accounted for in calculating the S corporation's gain or loss on the assets distributed in the liquidation, no adjustment to the shareholder's stock basis is allowed for any liability assumed on the liquidation.The major reason for converting to a pass-through entity is to allow the S corporation to recognize any built-in loss associated with the asset and pass the loss onto the S shareholder.

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The shareholders attempt to increase their basis in the S stock by the amount of liabilities assumed, thus allowing the deduction of losses that would otherwise be suspended.

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