![]() Or, if the shareholders hold unequal percentages of stock, the loss assets can be distributed to the shareholders who do not meet the definition of a related person.ĭistribution of disqualified property : Sec. ![]() 351 transaction or as a contribution of capital within the five- year period ending on the date of the distribution. However, this rule does not apply if the property is distributed pro rata to all shareholders and the property was not acquired by the corporation in a Sec. 267 if he or she owns, directly or indirectly, more than 50% in value of the outstanding stock. A shareholder is related to the corporation under Sec. 336(d)(1)(A) disallows corporate recognition of loss on certain distributions to a related person. 267) cannot recognize the loss if the distribution is not pro rata or disqualified property is distributed. However, a corporation making a liquidating distribution to a related person (under the rules of Sec. ![]() (Depreciation recapture and similar rules may also affect the character of the gain recognized.) Generally, corporations are allowed to recognize losses when property is distributed to shareholders in complete liquidation of the corporation. The character of the gain recognized (capital versus ordinary) depends on the character of the property distributed. 336, a liquidating C corporation must recognize gain or loss on distributions of property to the shareholders as if the property had been sold to them for its fair market value (FMV). The following is a brief general discussion of the tax treatment of a C corporation liquidation. Even with the lower 21% corporate federal income tax rate (effective after 2017), double taxation can be prohibitively expensive. 336 and another tax to the shareholders under Sec. The liquidation of a C corporation with appreciated assets can potentially result in double taxation - a tax to the corporation on the distribution of assets under Sec. The conversion of a C corporation into an LLC is treated as a complete liquidation of the corporation for tax. Interests in the LLC did not meet the requirements to be qualifying employer securities. 2014- 31, the Tax Court disqualified an ESOP established by a corporation that subsequently converted to an LLC. ![]() Warning: The conversion of a corporation into an LLC classified as a partnership can have unexpected and unintended results. However, in certain situations, a conversion to LLC status may be beneficial. Although a conversion allows the C corporation shareholders to continue to have limited liability while acquiring the advantages of passthrough taxation, the tax cost of the conversion normally will be prohibitive. Only infrequently will it be beneficial for a C corporation to convert into a limited liability company (LLC). ![]()
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