J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

44.11 Corporate Liquidation

Liquidation of a corporation and distribution of its assets for your stock is generally subject to capital gain or loss treatment. For example, on a corporate liquidation, you receive property worth $10,000 from the corporation. Assume the basis of your shares, which you have held long term, is $6,000. You have realized a long-term gain of $4,000.

If you incur legal expenses in pressing payment of a claim, you treat the fee as a capital expense, according to the IRS. The Tax Court and an appeals court hold that the fee is deductible as an expense incurred to earn income; the deduction is subject to the 2% adjusted gross income (AGI) floor (19.1).

If you recover a judgment against the liquidator of a corporation for misuse of corporate funds, the judgment is considered part of the amount you received on liquidation and gives you capital gain, not ordinary income.

If you paid a corporate debt after liquidation, the payment reduces the gain realized on the corporate liquidation in the earlier year; thus, in effect, it is a capital loss.

If the corporation distributes liquidating payments over a period of years, gain is not reported until the distributions exceed the adjusted basis of your stock.