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Old 11-28-2012, 02:07 PM
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Question Final Tax Return C Corp

I am preparing the books for filing a final 2012 return (1120).
The private c corporation has a few shareholders. Recently the shares were repurchased at a steep discount in anticipation of dissolution as company did not make any profits. There is some money remaining for final distribution to two key shareholders ($40k) plus a buffer amount for expenses ($10k). These funds will not be sent out until early 2013. The buffer amount will be paid out for legal and accounting work.

1. Do I report the legal/accounting payments on a 1099 for 2012 even though we may pay those bills in early 2013?
2. What balances should I report on the final return?

Thanks in advance!



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Old 11-28-2012, 04:24 PM
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“1. Do I report the legal/accounting payments on a 1099 for 2012 even though we may pay those bills in early 2013?”-----> You can treat taxes and other accrued expenses as deductions on the final year cash basis tax return 2012. This extends beyond taxes. However, there may be a time limitation as to when those expenses need to be paid in 2013. Most small corporate taxpayers use the cash receipts and disbursements method. Claims for deductions under the cash method may only occur when corporate taxpayers actually make payment before year-end and only if payment does not create an asset with a useful life lasting longer than 12 months. HOWEVER, you have final expenses and steps to take to liquidate assets of the business within the same tax year. The final income tax returns of the corporation reflect the final expenses you incur to close out the business, even when you file the final return after the dissolution takes effect with the state. In general, all final-expense transactions should occur within the same year you file for dissolution.You need to calculate your final expenses for the business. Final expenses may include outstanding accounts payable, wages, taxes and depreciation. Report expenses on Form 1120, lines 12 through 29. In addition, expenses you incur for liquidation are deductible, with the exception of reorganization costs, costs to resell or redeem the corporation’s stock and liquidation expenses paid by shareholders. Generally, the expenses incurred to liquidate a corporation are deductible. The expenses of selling the assets are normally charged against the gain for each asset. If a shareholder incurs liquidation costs in effecting a complete liquidation, the costs should be classified as capital expenditures. The costs will affect the shareholder's gain or loss upon liquidation. BUT, no deduction is allowed for any amount paid or incurred by a corporation in connection with reacquisition of its stock.Please visit the IRS website for more info;

Internal Revenue Manual - 4.11.7 Corporate Liquidations/Dissolutions


“2. What balances should I report on the final return?”----->In a complete liquidation of a C corp, a corporation recongnizes gain or loss on the distribution of property as if the property were sold to the distributee at FMV (what the assets would sell for). If FMV of assets are greater than basis, then the corp has a taxable gain upon distribution. Corporation must file Form 966, Corporate Disolution or Liquidation, and a certified copy of the plan of dissolution or liquidation (attorney should do). Do not file with tax return, but file separately with IRS. Look up instructions on IRS. Form 1099-Div and Form 1096 must be filed with the IRS for Shareholders who receivd liquidating distrib of $600 or greater. Copy goes to shareholder to report on individual tax return. Cash distributions go in box 8, and property distributions FMV go in box 9 of form 1099-Div.



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Old 11-28-2012, 05:51 PM
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Do we have to file 1099-DIV for liquidating dist or can we treat as repurchase of outstanding shares?

Most of the shareholders have been paid but the key shareholders will be paid after other expenses are paid



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Old 11-28-2012, 06:28 PM
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“Do we have to file 1099-DIV for liquidating dist or can we treat as repurchase of outstanding shares?”----->1099/1096 need to be filed with the IRS aslong as S/h receive liquidating distrib of $600 or greater. Distribution to extent of capital stock is basis to the shareholder. Then dist to extent of RE is dividend income - assume it would be qualified so subject to cap gains rate. Finally, remaining distribution is liquidating dividend. Final 1120 can show a zero balance sheet.

“Most of the shareholders have been paid but the key shareholders will be paid after other expenses are paid”----> Once a business dissolves, the company is limited to wrapping up business, such as selling assets. Thus, shareholders cannot continue to conduct regular business similar to that prior to the dissolution. For example, they cannot continue to conduct sales or promote the company. Depending on how many shares the shareholder owns in the business, the cessation of normal business may mean the shareholder must reexamine his general financial situation and investment portfolio.
Following dissolution of a company, shareholders may be entitled to sell their shares in the company. The company may buy the shares back from the shareholder, or other shareholders can purchase the shares available for sale.The amount that a shareholder gets as a result of share sales depends on the overall market.
So,It dedpns, I gues, some companies choose to distribute earnings directly to shareholders by issuing cash dividend checks, while others use profits and extra cash to buy back outstanding shares. In most cases, to capture your share of company earnings, you,s/h, need to sell your shares . Dividends are the one exception to this rule. If the company chooses to issue a cash dividend, it writes a check .The amount you receive depends on the size of the dividend issued and the number of stocks you own.Buying back shares of outstanding stock is actually a form of profit distribution to s/h. The percentage of equity each stock you own represents is determined by the number of outstanding stock shares. When a company uses its profits to buy back shares of stock, it reduces the number of outstanding shares, which increases the equity ownership each stock s/h own represents. In addition to increasing your equity ownership in the company, buyback programs benefit the keyshareholders in several other ways. Reducing the number of outstanding shares increases earnings per share, meaning that you own a larger portion of the company's future earnings.. First and foremost, dividend payments provide s/h with a steady source of income fr,om their investments. Regular dividends also protect you from the risk of share dilution.



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Old 11-28-2012, 06:37 PM
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A bit confused by your reply. Let me try:
The company never made a profit. So the distribution can be treated as reduction in basis? No need to treat as dividend as RE is negative. So the s/h can use the 1099-DIV to show reduction in basis?



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Old 11-28-2012, 07:00 PM
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“The company never made a profit. So the distribution can be treated as reduction in basis?”---> C corporation stock basis stays the same each year; annual income, distributions and loans can all affect an S corp shareholder’s basis, in sometimes surprising ways. Dividends can only be paid out of current and past earnings. Earnings and profits are not the same as retained earnings.So, I am not sure I fthis is the situation for the biz. If the corporation has current/ past year E & P, and therefore, any amounts paid would carry out ordinary income to that extent. Amounts paid in excess of current or accumulated E & P will simply reduce s/h basis in the stock.
“ No need to treat as dividend as RE is negative. “--->I guess then it depends as above. Earnings and profits are not the same as retained earnings.
“So the s/h can use the 1099-DIV to show reduction in basis?”---->As in the case above, Correct,OK???



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Old 12-03-2012, 01:31 PM
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I was told that if the shares were redeemed than do not issue 1099-DIV. Not sure what to issue if anything.
In a liquidation, the shares are cancelled and then any distribution is reported on a 1099-DIV.
Correct?



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Old 12-03-2012, 04:45 PM
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“I was told that if the shares were redeemed than do not issue 1099-DIV. Not sure what to issue if anything.”----->As said it depends on the situation. Basically, In regard to capital transactions, it can be difficult to know if Form 1099-DIV or Form 1099-B should be filed when stock is redeemed. There is not always a hard and fast answer to this question. Corporations must file either Form 1099-DIV or Form 1099-B when corporate stock is redeemed. Form 1099-DIV must be filed if $10 or more was paid when the stock was redeemed, and the corporation does not meet the “broker” definition. Proceeds should be reported in either box 8 or box 9 of Form 1099-DIV. If the corporation does meet the “broker” definition, then Form 1099-B should be filed. One of the filing requirements for brokers is met if a broker has sold stock (or various other securities) for cash, such as a corporation redeeming shareholder stock. Effective January 1, 2011, brokers that are required to file Form1099-B must now report additional information located on Form1099-B for “covered securities.” This additional information includes(but is not limited to) adjusted basis of shares sold as well as whetherthe gain or loss on the sale is long-term or short-term.SO, it can be difficult to determine which information return (1099-DIV or 1099-B) should be filed when stock is redeemed. The facts and circumstances determining whether the corps is regularly redeeming stock should be evaluated to determine if the correct forms are being filed. For corps required to file Form 1099-B, additional cost basis reporting requirements increase the administrative complexity.
“In a liquidation, the shares are cancelled and then any distribution is reported on a 1099-DIV.
Correct?”------>Correct; Liquidating divs related to E&P go on a 1099-DIV. For an S that's always been an S, they don't go on a 1099-DIV. The IRS requires a recipient of a cash liquidating distribution to record the amount he receives on Line 8 of Form 1099-DIV. For the IRS to view a cash liquidating distribution as taxable to its recipient, the amount received must exceed the taxpayer's basis in the corporation's stock.As the company was liquidated, the amount that they paid you out of the liquidation in cash is reported on 1099DIV in box 8, Cash liquidation distribution.Section 336(a) generally requires a corporation to recognize gain or loss upon a distribution of property in liquidation, as if the property were sold to the distributee at its fair market value. HOWEVER,The liquidating corporation does not recognize gain or loss on the distribution of property in connection with a tax-free reorganization unless the distributed property is taxed as boot to the distributee/shareholder.ALSO, No loss is recognized to a liquidating corporation on the distribution of property to a related person if the distribution is not pro rata .



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Old 12-03-2012, 05:00 PM
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It's definitely not a 1099-B as the corp is not a broker nor does it regularly redeem shares.
This small private corp simply repurchased the shares from remaining cash after all liabilities paid. There were no other assets of any value left.

So I think there is no reporting requirement. Thanks



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