Liquidating dividends and tax treatment

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In a firm or corporate liquidation, or when a shareholder redeems his or her interest, it’s not uncommon for the business to distribute property as well as money in exchange for the capital stock a shareholder held.

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According to the IRS, when a corporation distributes “clients and customer-based intangibles” to its shareholders, IRC sections 331 and 336 apply; such intangibles include the corporation’s client base, client records, workpapers and goodwill (including going-concern value).

There’s little doubt that distributions of the tangible property to shareholders in a liquidation are taxable under section 336.

The corporation recognizes income on the excess of fair market value over adjusted basis.

THE CRITICAL ISSUE FOR TAX PLANNING is whether the assets distributed are considered property under IRC code section 336 and whether the corporation owns them.

THE QUESTION OF WHO "OWNS" the clients and customer-based intangibles turns on whether there is an employment or noncompete agreement in effect at the time the intangibles are distributed.

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