Liquidating Dividends

[Golden Rocket]

I think I understand this, but helps to have corroborating opinions, right or wrong.

C Corp equity is a negative ($200,000). For purposes of discussion, assume Paid In Capital is +$1000 and Retained Earnings ($201,000).

After closing the year out with the above balances, there is a loan to shareholder of $60,000.

Shareholder can declare dividends of $60,000. These dividends are obviously not paid out of profit, and reduce retained earnings even further. There are other dividends in history, but they were paid from profits and were taxable to shareholder.

The $60,000 are non-taxable liquidating dividends, correct?

[ChEAr$]

I think I understand this, but helps to have corroborating opinions, right or wrong.

C Corp equity is a negative ($200,000). For purposes of discussion, assume Paid In Capital is +$1000 and Retained Earnings ($201,000).

After closing the year out with the above balances, there is a loan to shareholder of $60,000.

Shareholder can declare dividends of $60,000. These dividends are obviously not paid out of profit, and reduce retained earnings even further. There are other dividends in history, but they were paid from profits and were taxable to shareholder.

The $60,000 are non-taxable liquidating dividends, correct?

You forgot value of common stock. ?

Shareholders do not "declare" dividends; corporations via board of directors do. of course if your shareholder is the only shareholder,he's probably chairman of the board (grin)

Look at it this way, stockholder owes the corproation $60,000. If he doesn't pay it, would he not have ordinary income when corporation forgives him his debts?
And what does stockholder's equity have to do with anything?

[Snaggletooth]

Loans to Shareholders

I think a loan to a shareholder can be removed either by declaring dividends or by creating a bonus to accommodate repayment of the loan.

Either strategy doesn't require the shareholder to physically "pay" the loan, and by virtue of a dividend or bonus it is not considered "forgiveness".

My opinion only, of course.

[Gary2]

I don't get it. A $60K dividend is going to be $60K of taxable income to the shareholder. A $60K loan repayment will affect his basis (or at least it would for an S-Corp, I don't know about a C-Corp), but only the interest portion would be taxable income.

What am I missing?

[Corduroy Frog]

Return of Capital

Gary, I guess at what point does a dividend from a corporation become a "return of capital?"

Only when the capital stock is returned? Or when dividends are no longer paid out of profit?

[ttbtaxes]

Other than a distribution in redemption of stock (IRC Section 302), the taxation of a distribution is determined by the rules of IRC Section 301. Under 301(c)(1), it is taxable to the shareholder to the extent a distribution is a dividend as defined in IRC Section 316(a). Under 301(c)(2), to the extent a distribution is not a dividend, because there is neither AEP or CEP, it is then treated as a nontaxable return of basis, which reduces the shareholder’s adjusted basis in the stock. Under 301(c)(3), to the extent the non-dividend portion of the distribution exceeds the adjusted basis of the stock, the distribution is taxed as a capital gain from the sale or exchange of property.

[ttbtaxes]

Golden Rocket - what does the balance sheet look like prior to the $60,000 distribution?

[Gary2]

Oops. I guess I'm too used to using the label "return of capital" that I didn't think about it appearing on the 1099-DIV. This made me look, where I observe that the relevant labels seem to be "Nondividend distributions", "Cash liquidation distributions", and "Noncash liquidation distributions." I shouldn't get hung up on the labels, so I'll sit back and let others figure out exactly what this is.

[Snaggletooth]

See Original Post

Golden Rocket - what does the balance sheet look like prior to the $60,000 distribution?

There is $1000 in capital stock and a deficit in Retained Earnings of ($201,000), and this is PRIOR to the distribution.

If I read your above explanation, it looks this would translate into $1000 of totally tax free dividends, extinguishing the basis, but then a $59,000 capital gain.

[JON]

Snag

is right. You also have to check some yes s on the 1120 as to paying a dividend in excess of everything and make out a form (?)... If there are creditors that are awaiting payment-there must be- and do not get paid I would guess this opens the stockholder to some liabilbity. He may have it anyway.

[ttbtaxes]

There is $1000 in capital stock and a deficit in Retained Earnings of ($201,000), and this is PRIOR to the distribution.

If I read your above explanation, it looks this would translate into $1000 of totally tax free dividends, extinguishing the basis, but then a $59,000 capital gain.

I already read that and there should be double entry books.

We have a debit of $201,000, a credit of $1,000. That means we need net credits of $200,000 to which account(s)?

[Nashville]

Complete Balance Sheet

The remainder of the balance sheet should not be relevant to the question, but if there is a negative ($200,000) in equity, it is almost axiomatic that Liabilities exceed Assets by $200,000 (excluding rare non-operational circumstnaces). For purposes of discussion, one may assume there are $450,000 in assets and $650,000 in liabilities.

And the assets would include the $60,000 Due from Shareholder(s), since that is prior to the distribution.

What would a 1099-DIV look like to the shareholder? How much would appear in "Liquidating Dividends" and what else on the 1099-DIV would absolve the matching program if a capital gain were reported instead of ordinary dividends?