Pro rata liquidating distribution dating sie
Has it outlived its usefulness as an asset management, asset protection, or, dare we say it, wealth transfer vehicle?
The language of the regulations provides little comfort, stating merely, “Although a corporation is not treated as having more than one class of stock so long as the governing provisions provide for identical distribution and liquidation rights, any distributions (including actual, constructive, or deemed distributions) that differ in timing or amount are to be given appropriate tax effect in accordance with the facts and circumstances.” The regs do include a helpful example, however: S, a corporation, has two equal shareholders, A and B. The circumstances indicate that the difference in timing did not occur by reason of a binding agreement relating to distribution or liquidation proceeds.Some owners may want certain company assets, and other owners may want other company assets. Do you have the votes needed under the company’s operating agreement and local LLC law to authorize the LLC’s dissolution and liquidation? Our LLC, like most, is a partnership for tax purposes, and we, the owners, are partners for tax purposes.Are there third parties whose consents to dissolution, liquidation or the transfer of particular assets will be required? When assets are distributed by a partnership to its partners, a partner must recognize taxable gain for income tax purposes only to the extent that any money distributed exceeds the partner’s adjusted basis in his or her partnership interest immediately before the distribution.Does it seem time to split things up and let each owner go his or her own way with a share of the LLC’s property?If so, it may be time to dissolve and liquidate the company and distribute its assets to its owners.
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Practitioners often construe this requirement to be more restrictive than it really is, believing that a single disproportionate distribution will be an indication that you have more than one class of stock, and — Voila! Applying these concepts to our fact pattern above, if the S corporation makes a disproportionate distribution to A and B, the IRS would look to Treas. Section 1.1361-1(l)(2)(i) for guidance on whether the disproportionate distribution is indicative of multiple classes of stock.