I need to dissolve a corporation for a new client I just got. His Balance Sheet shows - $135K Loans from Shareholder, $10K Stock and $125K Retained Earnings. How it all plays in dissolution? Is there any way that I can show $135K as a liquidating dividend subject to capital gain treatment, or $125K has to be an ordinary dividend?
I am missing something. $135,000 loans from shareholder is a liability. Do you mean loans TO the shareholder? If so then you hope a liquidating dividend works. The loans TO should have been documented and interest paid or deemed paid. It would be nice to get the capital gain treatment-go for it.
I don't follow this whole scenario. It sounds to me like the "retained earnings" weren't really retained at all, but were paid out in what he pretends was a non-taxable loan but what was actually ordinary dividends. Now, having stripped out the assets, the shareholder wants to claim a big tax break for shutting down the operation.
And his previous accountant told him to go jump in a lake.
Obviously, the money that the corporation made over past years was not paid out as dividends. If it had been paid out as dividends, the charge would have been to "Dividends Paid" in the equity section of the corporation's balance sheet, and it wasn't, and a 1099 would have reported the payment, which it didn't.
So the corporation chose to lend the money to its shareholder, and now, when it's time to close things down and wind things up, and distribute the corporation's assets - oops, asset - the shareholder/borrower will have, most likely, a capital gain of $125,000, which is the excess of $135,000, the value of the loan [don't quibble about the "true" value of the loan; when you give a borrower his loan, the face value is the "true" value] over his basis in the stock, which is probably $10,000. Over and out, slam dunk, case closed, no other result is reasonable.
Yeah, I guess your client is lucky he didn't end up in somebody else's office, somebody who would make this distribution a dividend or possibly even treat it as salary... Ooh, there's an idea: claim it as salary, and carry the NOL back to see if any of the taxes on the $125,000 of retained taxable income can be recovered...
Don't forget to report the liquidating distribution (or do they call it a liquidating dividend? I forget.) on a 1099-DIV.
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