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Liquidating dividends and tax treatment

331, a liquidating distribution is considered to be full payment in exchange for the shareholder’s stock, rather than a dividend distribution, to the extent of the corporation’s earnings and profits (E&P).

For the most part, such a distribution is made from the company's capital base, and as a return of capital, is typically not taxable for shareholders.

This distinguishes a liquidating dividend from regular dividends, which are issued from the company's operating profits or retained earnings. A liquidating dividend may be made in one or more installments. S., a corporation paying out liquidating dividends will issue to its shareholders a Form 1099-DIV showing the amount of the distribution.

331 when they receive the liquidation proceeds in exchange for their stock.

If the corporation distributes its assets for later sale by the shareholders, the assets generally “come out” of the corporation with a basis equal to FMV (and with the related recognition of gain or loss under Sec.

Creditors are always senior to shareholders in receiving the corporation's assets upon winding up.

However, in case all debts to creditors have been fully satisfied, there is a surplus left to divide among equity-holders.

Consider the example of an individual shareholder who subscribed for the only share issued by a company for R10, represented by R1 of share capital and R9 of contributed share premium.

The company has since accumulated R2 of retained income, giving the share a market value of R12, and is now being liquidated.

If the company pays out a distribution of R11 in anticipation of its liquidation (representing R9 of share premium and R2 of retained income—everything but the share capital), the following tax implications arise: The portion of the base cost attributable to the part-disposal is (R9/R12 x R10), or R7,50 —the capital distribution is R9, the market value of the share is R12 (the Act provides that the market value prior to the deemed part-disposal must be used for the calculation), and the original base-cost of the share is R10.

A liquidating dividend is used when a corporation is dissolving and it needs to distribute its assets to its shareholders.

However on the part of the stockholder, the gain realized or loss sustained by the stockholder shall be treated as capital gain or loss subject to regular income tax rates under the Tax Code, and not to the Capital Gain Tax on the sale of shares.