1099 Div

[Nashville]

Clarity on the issue

Bees' most recent comment brings clarity to the situation. No taxability until dividends exceed basis. But a reportable event nonetheless.

A taxpayer invests $15,000 in a C-corp and that is his basis. If he receives $10,000 in liquidating dividends, there is no taxability, but the $10,000 is reported on Schedule D for both proceeds and cost.

It follows that his basis is now permanently reduced to $5,000. If he receives $10,000 in taxable dividends in the following year, he does not get to replenish his original basis. The $10,000 is reported as taxable dividends on Schedule B.

[All situations above assume a C-corp and not an S-corp]

[fliszt]

I called the company to obtain basis

and talked to one of the administrators. She told me that my client had not yet received all of his capital back yet. Why is it listed? She said the IRS rules state that once a liquidation process begins (2007) it must list a partial amount in box 8. Then in 2008 the liquidation process will be complete and at that time another 1099-DIV will be issued with the balance of the liquidation results. At that time they will be able to give me the holder's basis and the balance going to CG. So this year basis will equal the amount in box 8.

[Bees Knees]

Pub 550 says:

Liquidating Distributions
Liquidating distributions, sometimes called liqui-
dating dividends, are distributions you receive
during a partial or complete liquidation of a cor-
poration. These distributions are, at least in part,
one form of a return of capital. They may be paid
in one or more installments. You will receive
Form 1099-DIV from the corporation showing
you the amount of the liquidating distribution in
box 8 or 9.

Any liquidating distribution you receive is not
taxable to you until you have recovered the
basis of your stock. After the basis of your stock
has been reduced to zero, you must report the
liquidating distribution as a capital gain. Whether
you report the gain as a long-term or short-term
capital gain depends on how long you have held
the stock...

The Pub is misleading and poorly written because it implies you don't have to do anything until the liquidation exceeds basis. That is not true. You still have to report the liquidation proceeds on Schedule D, and then report your cost basis in the stock. Once the cost basis is used up, you will have gain. If you have a loss, because your cost basis is more than the liquidation proceeds, you get to deduct the loss.

[Bees Knees]

An amount would appear in Box 8 if the corporation's profits were was depleted, and thus "liquidating" dividends occur. The corporation may have no intention of dissolving.

Although not a very smart business practice, a C corp may pay liquidating dividends even though it is not dissolving. All that is necessary is that the dividends represent a return of capital.

Should this occur, does the shareholder have to report capital gains on Schedule D? If so, the percentage of his/her investment which has been depleted may be difficult to calculate. Can we report dollar-for-dollar so long as the shareholder has basis to accommodate, and then capital gains on any excess?

Form 1099-DIV instructions:

Box 8. Cash Liquidation Distr.
Enter cash distributed as part of a liquidation.
Box 9. Noncash Liquidation Distr.
Enter noncash distributions made as part of a liquidation. Show
the fair market value as of the date of distribution.

Whether the corporation is partially or fully liquidated is irrelevant. The shareholder is having his shares liquidated. No different than if the shareholder sold his shares. Thus, gain or loss must be reported on Schedule D.

[Nashville]

Corporation not dissolved

An amount would appear in Box 8 if the corporation's profits were was depleted, and thus "liquidating" dividends occur. The corporation may have no intention of dissolving.

Although not a very smart business practice, a C corp may pay liquidating dividends even though it is not dissolving. All that is necessary is that the dividends represent a return of capital.

Should this occur, does the shareholder have to report capital gains on Schedule D? If so, the percentage of his/her investment which has been depleted may be difficult to calculate. Can we report dollar-for-dollar so long as the shareholder has basis to accommodate, and then capital gains on any excess?

[fliszt]

Thanks again.

Appreciate your help!!
Larry

[Bees Knees]

Yes, it goes on Schedule D.

[fliszt]

Bees, then

does the information go on sched D as if it were a 1099B?
Thank you.

[Bees Knees]

No, its like a 1099-B. Only instead of the taxpayer selling his shares of stock, the corporation is liquidating his shares of stock. Otherwise it is treated no different than receiving a 1099-B. You need to know what the cost basis is in the stock.

[fliszt]

I have clients 1099DIV which has a dollar amount in box 8 Cash liquidation distribution. Is this simply a return of capital?
Thanks