Corporate Distributions & Liquidations (2025)

Corporate Dividends

Types of Distributions

Property Dividend — Shareholder Basis

• Shareholder's basis in distributed property = FMV at distribution date
• Distribution amount may be reduced by liabilities assumed by shareholder (e.g., mortgage on building)
• But basis remains FMV even if distribution amount reduced by attached liabilities

Property Dividend — Corporate Gain/Loss

• FMV > adjusted basis → corporation recognizes gain (as if sold at FMV)
• FMV < adjusted basis → corporation generally cannot recognize loss (except in complete liquidation)
• If property is depreciable/amortizable → gain may include depreciation recapture as ordinary income

Information Reporting

Form 1099-DIV

• Provide to each shareholder receiving ≥$10 in dividends by January 31
• Can provide early if final distribution made (any time after April 30 if with final distribution, or after November 30 if standalone)
• Also: W-2 to employees and 1099-NEC to contractors by January 31

Earnings & Profits (E&P)

Purpose

E&P determines whether distributions are dividends (taxable) or return of capital (non-taxable). Starting point = taxable income, adjusted.

Increases to E&P

• Long-term contract income (completed contract method)
• Currently deducted IDCs and mine exploration/development costs
• Dividend Received Deduction (DRD)
• Tax-exempt life insurance proceeds
• Federal income tax refunds
• Installment sale deferred gain
• Tax-exempt income (municipal bond interest)

Decreases to E&P

• Corporate federal income taxes paid
• Life insurance premiums on corporate officers (to extent not included in income)
• Excess charitable contributions (over limit)
• Expenses related to tax-exempt income
• Capital losses exceeding capital gains
• Corporate dividends and other distributions
• Non-deductible penalties/fines
• Non-deductible portion of meals (50% limitation)

Accumulated E&P

• Prior years' E&P not yet distributed
• Distribution order: current E&P first → accumulated E&P → return of capital (reduce basis) → capital gain
• Distributions from current or accumulated E&P = dividend income to shareholder (ordinary income, not capital gain)
• After E&P exhausted → "non-dividend distribution" (return of capital, reduces stock basis)
• Non-dividend distribution exceeding stock basis → capital gain

Important: Income Character Does NOT Retain

Unlike S-corps/partnerships, C-corp income loses its character when distributed. Tax-exempt income (e.g., municipal bond interest) becomes taxable dividend to shareholders.

Property Distributions

Corporate Gain Recognition

• Corporation recognizes gain when FMV > adjusted basis (same as sale treatment)
• Depreciation recapture may apply to depreciable/amortizable property

Corporate Loss Recognition

• Generally NO loss recognized on non-liquidating property distributions
• Exception: Complete liquidation → loss may be recognized

Stock Distributions & Stock Dividends

General Rule

• Distribution of corporation's own stock or stock rights = tax-free to shareholders
• Corporation cannot deduct

Taxable Stock Distributions (exceptions)

Stock distribution IS taxable if any of these apply:

1. Shareholder can choose cash/other property instead of stock
2. Cash/property distributed to some shareholders, stock to others
3. Distribution is convertible preferred stock
4. Preferred stock distributed to some shareholders, common to others
5. Distribution based on preferred stock ownership

Stock Issuance Costs

• Must be capitalized, NOT deducted or amortized
• Includes: printing, postage, consulting, transfer agent fees, stock exchange listing, legal/accounting fees, underwriting costs, IPO costs
• Treated as reduction in stock sale proceeds (like selling at discount)
• No deductible expense results

Constructive Dividends

Definition

Informal/indirect benefits to shareholders treated as dividends. Same tax treatment as actual dividends — taxable to shareholder, not deductible by corporation.

Common Examples

Stock Redemptions — §302

General Rule

Stock redemption = corporation buys back its own stock from shareholder. Treated as either:

• Sale/exchange → capital gain/loss (favorable), OR
• Dividend → ordinary income up to E&P

Treated as Sale/Exchange (§302) if any:

1. Substantially disproportionate: Shareholder's ownership after redemption <80% of before AND <50% of total voting power
2. Complete termination: Shareholder's entire interest redeemed
3. Not essentially equivalent to a dividend: Based on all facts and circumstances

Treated as Dividend if:

• Pro-rata redemption (no change in relative ownership percentages)
• Fails all three tests above

Corporate Tax Impact

• Cash redemption: no tax impact to corporation
• Property redemption: corporation may recognize gain (FMV > basis) but NOT loss (unless complete liquidation)
• Depreciation recapture may apply
• Redemption expenses NOT deductible as business expenses

Qualified Stock Redemptions

Requirements

• Must result in significant reduction in shareholder's ownership (e.g., retirement, permanent departure)
• Pro-rata redemptions generally treated as dividends (no ownership change)

Impact on Corporation

• E&P reduced by E&P attributable to redeemed shares
• Reduces future taxable distributions to remaining shareholders
• Does NOT increase remaining shareholders' stock basis

Non-Qualified Redemption

• Treated as dividend distribution (not sale/exchange)
• Shareholder gets ordinary income up to E&P

Corporate Liquidation & Dissolution

Filing Requirements

• Form 966: Must be filed within 30 days of adopting dissolution/liquidation resolution
• Final tax return: short-year return due 15th day of 4th month after short-year end
• Must file even if no income/activity in final year (until formally dissolved)

Corporate-Level Gain/Loss

• Complete liquidation: corporation recognizes gain AND loss (FMV − adjusted basis)
• Treated as if corporation sold all assets at FMV
• Related party exception: Cannot recognize loss on non-cash asset distribution to related party (shareholder owning >50% of stock value)

Shareholder-Level Gain/Loss

• Gain: recognized only after total FMV received exceeds total stock basis
• Loss: recognized only after final distribution received
• Gain/loss = FMV of assets received − adjusted stock basis
• Liabilities assumed by shareholder adjust the calculation
• Character: generally capital gain/loss

Series of Distributions

• Gain recognized as cumulative FMV received exceeds stock basis
• Loss recognized only at final distribution

Key Connected Rules

• C Corporation Formation & Taxation → See c-corporations.md
• Corporate Transactions (NOLs, DRD, Controlled Groups) → See corporate-transactions.md
• Accumulated Earnings Tax / PHC Tax → See c-corporations.md