Tax treatment of liquidating dividends

When a corporation liquidates its assets in part or in entirety, the corporation may issue liquidating distributions, also known as liquidating dividends, to its stockholders.A corporation may render noncash liquidating distributions, cash liquidating dividends or both.The Internal Revenue Service requires a recipient of a cash liquidating distribution to record the amount he receives on Line 8 of Form 1099-DIV.For the IRS to view a cash liquidating distribution as taxable to its recipient, the amount received must exceed the taxpayer's basis in the corporation's stock.In general, a stockholder's basis equals the amount he pays to acquire stock in a corporation, including commissions and related fees.If a person assumes ownership of stock through means other than purchasing it, the IRS provides guidelines for determining the individual's basis in the stock in IRS Publication 550.If, for instance, a taxpayer receives stock as the result of an inheritance, the IRS usually requires the recipient to assume the fair market value of the stock at the time of the deceased's death as his basis in the stock.If, on the other hand, a person receives stock as payment for services, the IRS requires him to claim the fair market value of the stock as income and assume the amount claimed as his basis in the stock.

If the total amount received by a stockholder exceeds the taxpayer's basis in the corporation's stock, he records a capital gain on his federal taxes.If a person receives cash liquidating distributions that equal a sum that is less than his basis in the corporation's stock, he records a capital loss.The length of time a taxpayer owns the stock issued by the liquidating corporation determines whether he records his capital gain or loss as short-term or long-term on his federal taxes.A person's holding period begins the day after he acquires stock in a corporation and ends the day after he receives payment, or a final liquidation distribution, for the stock.If a taxpayer holds a stock for one year or less, the IRS considers his capital gain or loss as short-term.

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