Similarities and Distinctions in Tax Treatment Among Business Entities: Liquidation

Question 1

Both C corporations and S corporations

Answer 1

will recognize a gain or loss when the corporation is liquidated

Question 2

Gain is recognized by a partner

Answer 2

if cash received in a liquidating distribution exceeds the partner’s adjusted basis

Question 3

in a partnership

Answer 3

if no cash equivalents are distributed, no gain is recognized.

Question 4

The rules for liquidating distributions for a partnership are as follows:

Answer 4

1) If a partner receives cash or marketable securities (cash equivalents) in excess of the partner’s adjusted basis, then gain is recognized on that excess.
2) If no cash equivalents are distributed, no gain is recognized.
3) If a partner receives cash, unrealized receivables, or inventory in a liquidating distribution, a loss may be recognized by the partner equal to the difference between FMV and the partner’s basis.
4) If only other property is received, then no loss may be recognized.