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Tax implications of liquidating a company

The shareholder’s adjusted basis in the stock is subtracted from the cash and fair market value (FMV) of other property received from the corporation. The general rule is that a shareholder’s stock basis is determined as of the end of the S corporation’s tax year. If the shareholder has different bases in different blocks of stock, the computation of gain or loss depends on whether there is a single distribution or a series of liquidating distributions (Rev. receives ,000 in 2007 and an additional 5,000 in 2008, each distribution is allocated ratably between the blocks based on the number of shares in each block.

If the shareholder assumes known corporate liabilities or receives corporate property subject to a liability (such as the distribution of mortgaged land), the amount realized is reduced by the amount of the liability (Ford, 311 F2d 951 (Ct. It appears that the adjusted basis of stock held in a liquidating corporation is adjusted for current-year passthrough items prior to determination of gain or loss from the receipt of the liquidating distributions (see Regs. The 2007 distribution is allocated the same as before.

By way of background, s47(1)(a) of the Act defines a ‘liquidation distribution’ as any transaction in terms of which a liquidating company, which is a resident (as defined), distributes all of its assets to its shareholders in anticipation of or in the course of the liquidation, winding-up or deregistration of the liquidating company, to another company which forms part of the same group of companies on the date of that disposal; whereas, the definition of ‘amalgamation transaction’ in s44(1)(a) envisages an amalgamation transaction in terms of which a South Africa resident company disposes of its assets to another resident company by means of an amalgamation, conversion or merger and as a result of which the amalgamated company’s existence will be terminated.

The Ruling concerns two South African resident companies (Applicant and Co-Applicant) who are fellow subsidiaries and have common shareholders.

Consequently, the Applicant and Co-Applicant proposed that the two companies amalgamate and consolidate their operations.

Consider a case examined by the Internal Revenue Service last year that provides insight into a useful tool for companies that expect to liquidate assets.

Liquidation is also sometimes referred to as winding–up or dissolution, although dissolution technically refers to the last stage of liquidation. In law, liquidation is the process by which a company is brought to an end, and the assets and property of the company redistributed.

The main purpose of a liquidation where the company is insolvent is to collect in the company’s assets, determine the outstanding claims against the company, and satisfy those claims in the manner and order prescribed by law.  at [[email protected]] or call us at 91 88208208 11. Liquidation is also sometimes referred to as winding–up or dissolution, although dissolution technically refers to the last stage of liquidation.

If the company pays out a distribution of R11 in anticipation of its liquidation (representing R9 of share premium and R2 of retained income—everything but the share capital), the following tax implications arise: • The shareholder receives a tax-exempt dividend of R2 (giving rise to a liability for secondary tax on companies (STC), at a rate of 10%, in the hands of the company); and • The shareholder receives a capital distribution of R9, giving rise to a deemed part-disposal under paragraph 76A of the Eighth Schedule.

In law, liquidation is the process by which a company is brought to an end, and the assets and property of the company redistributed.

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