Rules for liquidating a company

The LLC has enough cash to make one or a series of liquidation payments to J for the full value of his interest. If the LLC distributes 0,000 cash to J, he will recognize a capital loss of 0,000.

J has no current or planned capital gains, so his ability to use the 0,000 loss will be Suppose, instead, that BC distributes to J 0,000 cash and one of the small office buildings that has a FMV of 0,000 and a tax basis to BC of 0,000.

The loss recognized is the excess of the member's adjusted basis in the LLC over the sum of the cash distributed and the member's basis in the unrealized receivables and inventory received (Sec. Z's adjusted basis in the real property is ,000.

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Upon distribution of property in complete liquidation, the corporation is treated as if the distributed property is sold at FMV to the distributee (Sec. The distributee shareholder generally must recognize gain or loss equal to the difference between the FMV of the property received and his or her basis in the corporation's stock (Sec. Possibility of Gain or Loss Recognition Gain is recognized by a member in an LLC classified as a partnership on the receipt of a liquidating distribution to the extent money is distributed in excess of the distributee member's basis in his or her LLC interest (see Sec. 751 hot assets (unrealized receivables and substantially appreciated inventory) are not proportionate (see Sec.

751(b)); (2) property that had an FMV different from basis on the date of contribution is distributed to a member other than the contributing member within seven years of contribution (see Sec.

This excess basis is subject to the depreciation rules, lives, and methods in effect at the time of the distribution (Sec. Holding Period for Distributed Assets A member's holding period for property received in a nontaxable distribution includes the holding period of the LLC (Secs. This rule applies whether the member receives the property in a current distribution or a liquidating Suspended Losses If an LLC distributes assets to a member in a liquidating distribution and those assets have been used in a passive activity, the member continues to carry over any suspended passive activity losses (PALs) with respect to that activity.

The suspended PAL is allowed without limitation if the member disposes of substantially all of the passive activity (or his or her interest in the activity) in a taxable disposition to an unrelated third party (Sec. Accordingly, if a member receives only cash in complete liquidation of his or her LLC interest, it appears any suspended PALs generated by the LLC's activities should be fully deductible in the year of the liquidating basis from the same activity (Sec. Any losses suspended because of lack of basis under Sec.

1231 property to J and he sells the building for its 0,000 FMV, he will realize a Sec.

1231 loss of 0,000, which will be ordinary, assuming he has no other Sec.

704(c)(1)(B)); (3) the distribution is within seven years after a contribution of appreciated property (see Sec. He has never contributed property other than cash to the LLC.

737); or (4) the distribution is part of a disguised sale (see Sec. A loss may be recognized upon a distribution in liquidation of a member's interest if no property other than cash, unrealized receivables, and inventory is received. Nontaxable liquidating distribution of cash and property: Z LLC is liquidating. To liquidate his interest, Z distributes to R ,000 cash plus real property with a ,000 FMV.

The LLC can make a liquidating distribution of cash and marketable securities up to the retiring member's basis and then distribute other property for the balance of the required Warning: The IRS recharacterized as a taxable distribution of cash the distribution of a personal residence to a partner in liquidation of his interest.

In Chief Counsel Advice 200650014, the IRS addressed a situation where a partnership formed an LLC to acquire a house for distribution to the retiring partner under the terms of a redemption agreement.

Under the terms of the agreement, a substantial portion of the purchase price of the house was provided by a loan from a related party that was immediately repaid by the retiring The IRS attacked the purported distribution based on the fact that (1) the distribution was not a distribution of partnership property since the house was acquired and held for the account of the retiring partner, (2) the distribution should be recast in accordance with the doctrine the acquisition of the house by the partnership and its distribution to the retiring partner should be disregarded, and (4) the acquisition of the house by the partnership and its distribution to the retiring partner lacked economic substance and were unnecessary steps taken solely to achieve tax A member can recognize a loss on the liquidation of his or her LLC interest if the distribution consists solely of money, unrealized receivables, and inventory and the LLC's basis in those assets is less than the member's basis in the liquidated LLC interest.