Cash Liquidation on 1099-DIV

[Gary]

I have a new client that owned a commercial rental real estate property with a partner. Over the past 20 years, she has reported her half of the rental income on schedule E. She did not report depreciation correctly, but that is another problem. In 2005 she sold her half to the partner. She received a 1099-DIV with cah liquidation in Box 8 and non-cash liquidation in Box 9. What do you do with the amounts listed in these two boxes? TheTaxBook, page 6-3 states what is in these boxes, but doesn't tell what to do with them. I guess I should know the answer, but don't. Please help.

Gary

[OldJack]

Normally liquidating distributions are treated as sale proceeds for 1040 Sch-D with the individuals outside ownership basis as cost to determine capital gains or loss.

[veritas]

Who issued the 1099Div? I don't see any reference to a corporation?

[Snaggletooth]

What kind of entity?

Gary what kind of entity was this "partnership?" Could it really be a corporation, or a sub S corp, or maybe a REIT (a special entity restricted to real estate investments).

If so, your client has been improperly reporting her share of income lo these many years on a Schedule E as "rent." However, at least the income is reported, and correction thereof may result in very little adjustment.

I really think you need to know this before you can go any further. It sounds like the accounting firm for the entity is issuing 1099-DIVs similar to a REIT. If so, be on guard for liquidating dividends which are non-taxable.

There are many things which may turn up as a result of this entity. It is almost certain that this will also give rise to a capital gain.

[Gary]

More Information

I went back and questioned the client. She and her partner had a corporation and they received W-2 wages from the Corporation. The corporation rented the commercial building from my client and her partner, and they reported this rent on schedule E. Last year they went out of business and disbanded the Corporation. This was the source of the 1099-DIV with cash and non-cash liquidations. She did not have a K-1 in the last two years (and may never have had one). I have no idea how they did the corporation taxes.

I still don't know what to do with the liquidations.

Any ideas? Any other questions I need to ask? I have forgotten everything I learned about Corporations since I passed the EA test.

Thanks,

Gary

[Unregistered]

cash dividends box 8

These dividends are paid when a corporation dissolves and disposes of all its assets. They are a return of the investor's capital and are not taxable unless they exceed the investment, in which case they are taxable as a capital gain. If the distribution is less, it may be treated as a capital loss on Schedule D.

[Gary]

Box 9

Does this also apply to the non-cash distributions in Box 9?

[Snaggletooth]

Accounting

Gary, after giving details as you have, I don't believe the 1099-DIV by itself will define how to pour the proper amounts into the proper buckets. The entire settlement must be looked at.

Firstly the 1099 should state if any of the dividends are taxable as dividends instead of capital gains. If any amounts are shown in the box as "Ordinary Income" it should be reported as dividends on Schedule B. The rest of the distribution, cash or otherwise, should become a focal point for calculating capital gains.

The owner should know what she contributed as capital to the corporation at its point of formation. This is the responsibility of the client if you were not in the picture when the corporation was started. Her contribution should include cash, guaranteed debt, and the fair market value of any non-cash contributions. This "basis" should be increased for further contributions made in later years. This should be measured against the 2005 distribution (which should NOT include any "ordinary" dividends). The non-cash distribution should be counted with its monetary value the same as if it were cash.

If she has rented to the corporation, this should have been reported separately over the years as a different transaction entirely from dividends, and collection (or non-collection) should not be part of the capital gain (loss), unless indebtedness to this shareholder for unpaid rent is a part of a receivables/payables non-cash distribution.

[OldJack]

Does this also apply to the non-cash distributions in Box 9?

Simply stated box 8 and box 9 are added together and reported as proceeds on 1040 Sch-D with the client advising you what the cost basis should be to determine gain/loss on the 1040 Sch-D.