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Posted by / 29-Nov-2017 19:59

Tax implications of liquidating

S Corporation liquidations generally are subject to the same rules as C corporations.However, the lack of entity-level tax in most cases creates different tax considerations.A liquidating trust may also be an effective method for a fund manager to wind down a fund without having a significant role in the liquidation.At the end of the fund's life cycle or term, the fund manager may have certain assets that are not easily liquidated and convertible into cash for distribution to the owners of the fund.The objective of a liquidating trust is to help expedite the liquidation of the entity, and allow the owners to recognize gain or loss and to receive proceeds in an orderly manner.In addition, it may be prudent for the fund manager to set aside certain cash reserves before making final distributions to the fund owners.

The panel will provide a briefing on the general rules stated in IRC Section 1371 tying liquidation rules back to those applying to C Corps, detailing the gain/loss on distributions in exchange for stock, and outline two-three scenarios illustrating the rules in action.

Distributions to the shareholder are not included in the shareholder’s gross income to the extent that the distribution does not exceed the shareholder’s basis in the stock.

Because the tax consequences of distributions depend on the shareholder’s basis, it is important to keep up with changes in the shareholder’s basis over time.

Download PDF When "Liquidating Trust" is mentioned, most people associate this with bankruptcy.

In a bankruptcy, a liquidating trust may be formed whereby certain assets are placed in a trust for the benefit of creditors who may have certain claims against those assets.

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