Liquidating distribution or dividend
Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice.A cash liquidation distribution, also known as a liquidating dividend, is the amount of capital returned to the investor or business owner when a corporation is partially or fully liquidated.Viewed from the other perspective, however, the framing of the various statutory provisions in our tax code relating to taxation of sale of assets may provoke controversy as to the proper theory upon which to proceed in taxing stockholders on the receipt of liquidating distribution.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.Instead of being treated as dividends, redemptions are treated as a sale or exchange of the stock by the shareholder. The distinction can be important when the long-term capital gains rates (which apply to redemptions) are higher than the tax rates on dividends.
Often, proceeds from cash liquidation distributions are reported on Form 1099-DIV.The IRS mandates in section 331(a) of the IRS Tax code that distributions of 0 or more must be reported on Form 1099-DIV.Any taxable amount the investor receives is reported on Schedule D, the capital gains and losses statement that is filed with the IRS form 1040 during yearly tax filings. When he receives a cash liquidation payment of , of that is a return of capital and is not taxable, while is the gain and is taxable. When she receives her payment of , it does not cover his original cost basis in the stock. Amounts above investors' cost basis are reported as capital gains, a taxable distribution.Amounts below investors' cost basis are reported as capital losses.