WHETHER PLANNING FOR A LIQUIDATION of their own professional practices or advising clients about the liquidation of a commercial organization, CPAs will find that the problems and the solutions associated with each are likely to be the same.awyers advise CPAs to have employment and noncompete agreements in their accounting practices.The only exception to ceasing operations is limited to communications and transactions necessary to dissolve the business.For example, Texas law allows S corporations engaged in a dissolution process to file for or continue engaging in any pending administrative, criminal or civil legal proceedings in connection with dissolution or other outstanding legal matters that existed before the process began.Witness the situation described in recent letter from the Internal Revenue Service (LTR 200806006, November 7, 2007), which addresses a seeming anomaly related to the tax code.The anomaly is corporate dissolution without liquidation.In the ruling, a corporate taxpayer had been incorporated in a state on a particular date, let’s say January 19, 2007.The company was “administratively dissolved” some time after, for example, effective January 25, 2008, due to its failure to timely pay state franchise taxes.
When a firm or corporation distributes to its shareholders all of its assets, both tangible and intangible, and ceases doing business, the IRS says there is a taxable distribution of its intangible goodwill.As a result, dissolving and liquidating an S corporation must be done in accordance with corresponding laws in the state in which the S corporation is registered to operate.State business codes specify the procedures corporate managers must follow to execute the legal termination and asset liquidation of an S corporation. Obtain a vote and decision to dissolve the S corporation from shareholders.Notifying each creditor helps identify the rightful claimants of any proceeds from liquidated company assets. The proceeds from the sale or distribution of property must go toward paying all outstanding debts and obligations the S corporation holds.Because the income of S corporations is taxed to the owners when the income is earned, a mechanism is needed to ensure that the shareholder is not taxed again when the earnings are distributed.Even if S corporation were owned 50-50 between spouses in a non-community property state, the S corporation is a bad result owning land.Subscribe Get timely updates about taxation, accounting, succession planning, and other issues that are unique to farmers and agribusiness processors.At issue is whether the company’s status as a corporation had been terminated by the administrative dissolution. Something else to consider is that under Section 336(a) of the tax code, a gain or loss is recognized by a liquidating corporation on the distribution of its property in complete liquidation, as if such property were sold to the distributee at its fair market value. 142 ) states that “…where a corporation ceases business operations, has retained no assets, has no income, and has actually liquidated, there is in effect a de facto dissolution, even though the corporation has not been formally dissolved…” In addition, it is entirely possible for the corporation to continue in existence even though it has been, as a matter of state law, dissolved.If it is considered terminated, the company would have been viewed as having completely liquidated, and both it and its shareholders would have experienced the tax consequences attendant to the situation. In other words, in most cases, the liquidation of a corporation commonly engenders two levels of taxation: tax will be imposed at both the corporate and distributee shareholder levels.* The De Facto Company Closure A complete liquidation is not always accompanied by a formal or legal company shutdown. Thus, unless dissolution brings about an automatic transfer of the corporation’s assets to its shareholders, the corporation, even though dissolved, continues its existence.Thanks, Allen Jackson New Albany, MS 38652 Not to mention the aspect of the decedent not owning 100% of the S corporation.If Decedent and Daughter owned the S corporation 80-20, the death of the decedent provides the estate a step-up in basis on the estate’s 80% share.