Post liquidation expenses C-Corp

[natiro]

C-Corp sold all assets in October and is still winding down. Distributions in complete liquidation will be made in January 2007. There will be expenses incurred after liquidation since seller has agreed to reimburse buyer for any outstanding gift certificates which are redeemed through end of April 2007. Since there will be no corporate gross income in 2007, there will be no tax benefit from these reimbursements. We cannot carryback any NOL since there was no taxable income in prior years (owner was paid reasonable salary and FICA tip credit offset all corporate taxes.)

In TTB 18-18, it says post liquidation expenses paid by a shareholder after a complete liquidation are treated as capital expenses and are added to stock basis.

I'm thinking that if the shareholder personally reimburses the buyer for the gift certificates as they are redeemed, and if he can add that expense to his stock basis, then he will get benefit from doing so on his personal return.

I'm not able to find anything in the code or regs which support TTB statement for C-Corps (I can find support as it relates to increasing stock basis for S-Corps.)

Would the shareholder's payment for the gift certificates (post-liquidation) increase his basis for his C-Corp stock? If so, can you point me in the right direction in the code or regs which support this?

Many thanks and Happy Thanksgiving to everyone.

[Bees Knees]

The idea is that if the shareholder is receiving the assets upon liquidation of his stock, the shareholder is also accepting any liability attached to those assets. If the shareholder is liable for reimbursing outstanding gift certificates because of the terms of the sale agreement, then that is a capital expense, as it is attached to the value of the assets received upon liquidation.

[Roland Slugg]

Accrual basis corp?

Is the liquidating corp an accrual basis taxpayer? If so, keep the 2006 books open until all the G/Cs and all other expenses are paid. The 2006 return can be extended to 9/15/07 (assuming it's on a calenday year), and that may be all the time needed to nail everything down. You said the G/C liability only goes through April 2007.

Even if this is a cash basis corp, why can't a 2007 loss be carried back to 2006? Was there no taxable income even in the year all the assets were sold? If that's true, it would seem the shareholder's 2006 salary was needlessly high.

Finally, if neither of the above applies, the shareholder simply has to leave enough in the corp for it to pay all its final bills, including the G/C liability. The corp may not get a tax benefit for the final year's expenses, but at least the shareholder will receive a tax benefit of his own. The corp's L/Ds will be less and, thus, so will the shareholder's capital gain on the liquidation. If the corp has already paid out too much and now needs additional cash, the shareholder can make an additional contribution to the corp, thus increasing his basis.

[natiro]

C-Corp liquidation

Bees and Roland. . . thanks for your replies. Of course, Roland, you are absolutely correct about corp paying expenses which reduces liquidating dividend to shareholder, thus reducing gain. I can't believe I completely missed that! (Well, I guess I can. . .I'm really thinking about baking at the moment!) I was just thinking about the expense itself, but not the fact that it would use up cash.

Due to how the sale was structured and the fact that they had basis in purchased goodwill, the corp tax on the sale gain wll be fully offset by tip credit c/o. And then there will be additional credit c/o for which they will not get benefit. I agree, I would have paid the owner a lower salary for the last couple of years (since they became my client) but they did not want to lower it. It wasn't high. . .just that they could have paid him less.

Anyway, thank you both so much for your quick replies.

Now. . . back to baking!