Corporate Distributions in Corporate Liquidations: What gains are recognized by the liquidating corporation on the distributions in complete liquidation?
A cash method corporation adopts a plan of complete liquidation and distributes the following assets to its shareholders:
- A truck that was purchased for $25,000, is worth $18,000, and has a basis of $11,000.
- An installment note receivable with a remaining face amount of $20,000, resulting from a sale of a warehouse for $75,000 seven years ago in which the warehouse's basis at the time of sale was $25,000.
- Accounts receivable of $7,000.
- Supplies and small tools previously expensed, worth $350.
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The truck transaction is straightforward: fair market value - adjusted basis = gain.
Even though a cash basis corporation, the installment note was being taxed as it was paid under the following doctrine:
CLEAR REFLECTION OF INCOME DOCTRINE - This argument maintains that in light of the requirement that an accounting method must clearly reflect income [IRC section 446(b)], an accounting method that is acceptable for a continuing business may not be allowable for a liquidating business. A corporation that is on the completed contract method and liquidates when a ...