Liquidating company avoid tax

Posted by / 22-Jun-2017 16:00

One drawback to not liquidating is the potential for double taxation if assets in the corporation continue to appreciate and are not held by the corporation until the owner's death.

If the corporation is kept in existence until the owner's death, the owner's heirs will generally step up their basis in the stock to its FMV, generally allowing them to receive the corporate assets in liquidation without paying income tax (since the value of the stock should equal the liquidation proceeds).

The idea is to prevent the formation of corporations to receive and indefinitely hold investment income or compensation income of their individual shareholders.

The PHC tax is really a penalty tax (paid at the rate of 20%) on such undistributed corporate income and is intended to force affected corporations to distribute income in the form of dividends, which are taxable income to the shareholders and nondeductible by the paying corporation.

Or, if the corporation is not liquidated until after the owner's death, the heirs would take a basis in the inherited stock equal to its date of death (or alternate valuation date) FMV, so they should receive the liquidation proceeds and owe little or no tax.

Although leaving the corporation intact after selling the business assets to the successor can avoid double tax on the corporate assets, this plan should be undertaken only after considering the effect on the owner's financial planning and retirement planning, as well as the impact on the owner's estate planning goals. 338 provides that certain stock purchases can be treated as asset acquisitions in which the target is deemed liquidated. 338 allows a corporation that has purchased at least 80% (in value and voting power) of the stock of another corporation to make an election to step up the basis in the target corporation's assets, much as if the assets had been purchased instead of the stock.

liquidating company avoid tax-2liquidating company avoid tax-27liquidating company avoid tax-27

Frequently, when an asset sale is used to transfer business ownership, the selling corporation is liquidated to provide cash to the business owner (or dependents, if the transfer is after his or her death).