C corp liquidating distribution
In determining if a payment to a shareholder is proceeds from a tax-free loan from a corporation to a shareholder or a tax-free repayment of a loan from the shareholder to the corporation (as opposed to a potentially taxable corporate distribution to the shareholder), courts look at whether: 1. Upper-income individuals may also owe the 3.8 percent Medicare net investment income tax on dividend income.There is a written promise to repay evidenced by a note or other document. There is a stated principal repayment schedule or balloon repayment date. For other taxpayers, the tax rate on dividends remains 15 percent.The beginning basis for stock is the amount the shareholder invested to obtain the stock.Forming a C corporation was once the only way the owner of a small business could shield himself from the debts and liabilities of the company.The characterization of distributions from a C Corp will be generally determined at the end of the tax year, rather than at the point when the distribution is actually made.Depending on the tax position of the dividend recipient, a corporate shareholder may prefer to receive distributions characterized as capital gains in a year in which they have expiring capital loss carryovers, or ordinary dividends in a year in which the recipient has a tax loss. Corporations or individuals will often have foreign taxes withheld at source — generally ranging from five percent to 30 percent.When a company has more liabilities than assets, equity is negative and no liquidating distribution is made at all.This is usually the case in bankruptcy liquidations.
To the extent the distribution is made in the form of property, rather than cash, the taxability is generally measured by the fair market value of the property distributed.
Creditors are always senior to shareholders in receiving the corporation's assets upon winding up.
However, in case all debts to creditors have been fully satisfied, there is a surplus left to divide among equity-holders.
General Definitions The controlling definitions, which impact the tax treatment for C and S Corp shareholders include: (DRD) In general, dividends received by a corporate stockholder from an affiliated domestic corporation will be able to exclude 100 percent of such dividends received (on the theory the profits have already been subject to corporate-level taxation).
To the extent the recipient owns at least 20 percent of the corporate payor's stock, the dividend is generally eligible for an 80 percent DRD and most other domestic dividends are eligible for a 70 percent DRD.
Such values may be reduced to the extent the property is encumbered with debt.