Retained Earnings in C Corp Complete Liquidation

Technical topics regarding tax preparation.
#1
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Small C Corporation is liquidating. 2 shareholders. Balance sheet has $200,000 cash on the asset side; Capital Stock of $50,000 and Retained earnings of $150,000 on the liability side. Other assets were all sold and Corp paid the appropriate taxes on the gains.

Shareholders split the $200,000 and liquidate. What happens to the retained earnings?

I see $75,000 gain to each shareholder ($100,000 cash - $25,000 cap stock). I've simplified a little, and assume the basis in their stock is equal to the $50,000 in that account. I wasn't there in the beginning and don't see how it could be different considering it's a C Corp and always has been.

There should be no dividend income because it's a complete liquidation; but again what happens to the Retained Earnings ?

Thanks
 

#2
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Poof! Disappears with the corporation.
 

#3
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There's no dividend because you've made a liquidating distribution. Tax is most likely the same, unless a shareholder has capital losses.
As far as a bookkeeping entry, retained earnings is still reduced to zero with the distribution.
~Captcook
 

#4
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make sure the corporation files Form 966 and a 1099-DIV reporting the distribution as a liquidating distribution
 

#5
Nilodop  
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There should be no dividend income because it's a complete liquidation; but again what happens to the Retained Earnings ?. See entry below.

Poof! Disappears with the corporation.. Puff the Magic Dragon.

As far as a bookkeeping entry, retained earnings is still reduced to zero with the distribution.
Entry
dr cap stock 50
dr r/e 150
cr cash
 

#6
Lin-CPA  
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Coming back to this question, would the code section to use on Form 966 of this liquidation be 331?

I have a similar C Corp liquidation scenario where there is only cash left to distribute to stockholders. Final asset (land) was just sold in 2022 and my plan is to file the 966, and file the final 1120, pay the tax on the gain from the sale of the land, then make liquidating distribution to stockholders.

Thanks!
 

#7
Nilodop  
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I could argue both 336 and 331 apply.

Instructions say 331.
 

#8
MilesR  
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331 says complete liquidation is treated as if it was exchanged for their stock. So each individual reports on sch D as 100k proceeds minus stock basis = gain. There is no dividend.

There is no property so I don't see how 336 applies. There is just cash.
 

#9
Nilodop  
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I agree, MilesR, when like here there is only cash being distributed.

But where there is other property, the 966 Instructions are not much help.
Line 10
Identify the code section under which the corporation is to be dissolved or liquidated. For example, enter “section 331” for a complete or partial liquidation of a corporation ...
. Well, I can see at least 331 and 336 and maybe even 334. You see, the form asks for the section under which the corp. is to be dissolved or liquidated. The right answer would be none, it's dissolved or liquidated under state law. But if they mean which sction applies to the liquidation, the three I mention are all candidates.
 

#10
MilesR  
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I get what you're saying. I guess that line is pretty vague and could be a few different citations. It looks like even 302 for partial liquidations and even 361 for liquidations as part of a reorg.

I think in this case the only section that applies is 331 so they should be fine putting that.

Also, I've heard that the IRS is generally just happy with an 1120 marked "final" and they don't really care if a 966 is filed. Since it's a relatively small, closely held corp, a 966 is probably okay to omit. But it doesn't hurt to file.

I think it really depends on your state law. Some states don't require a plan to liquidate. If there is no requirement for a plan, then it seems there is no need to file a 966. I think this is why the IRS is pretty lax on these. If the corp is in CA then they don't require a formal plan of liquidation so unless a formal plan is made, then I don't see a reason to file 966.
 

#11
Lin-CPA  
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I was also thinking 331 or possibly 336. I’ll go with Sec 331.

It’s a FL corporation. I will check on any state requirements, too!

I appreciate the input!

Thank You!
 


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