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Video instructions and help with filling out and completing Form 966

Instructions and Help about What Is Irs Form 966

Hi class were on chapter six now which covers corporate liquidating distributions now in our last chapter chapter four we talked about non liquidating distributions in this case we have a company that's going to is going to distribute all of its assets and liabilities and pay off all of its liabilities so it's essentially going to liquidate and then it may actually shut down after it liquidates it may dissolve it's as a corporate entity now this situation awry arises when the management decides that they no longer want to operate the corporation for a number of reasons and there are two ways that you can shut down a corporation you can sell all of the assets first and pay tax on the gain and then distribute the cash that you received on sale of the assets and any remaining cash that you had outside of the sale to your shareholders in that case the corporation is paying tax on the gain on sale of its assets and then the shareholders are paying tax on the distribution as well because it's either going to be treated as a dividend to the extent of enp of corporate EMP or it's going to be retreated as a return of basis and then because they're the corporation is liquidating the basis is always going to get reduced down to zero and whatever is distributed to the shareholders in excess of basis is going to be treated as capital gain so you can see in the first situation that there's been a that the situation of selling the assets first and then distributing the leftover cash creates double taxation on the other way that you can shut down a corporation is by distributing the corporate assets to the shareholders and in that case you're still going to have two layers of tax on the gain as we'll see later now in the book there's a nice example but laid out for you on page three and it's actually Music pictorially shown here and in this situation we've got Randy Jones who owns a ball corporation here's Randy and owner we also have some creditors people who are able corporation owes money to we've got an unrelated purchaser of some of the assets of April corporation and then we've got the government shown down below who is going to be the receiver of taxes owed on the liquidation of the corporation and in this situation Randy is a hundred percent owner of April corporation which is a C corporation and Randy's basis in the stock is a hundred thousand dollars the corporation's assets are they have fifty thousand dollars in cash they've got stock with the basis of stock in another company of $75,000 basis with a hundred and twenty five thousand dollar fair market value they've got machinery with a basis of a hundred and fifteen thousand and a fair market value of two hundred and in step one Abel sells its machinery to an unrelated purchaser for two hundred thousand which is the fair market value of the machinery and the since the machinery had a basis of a hundred and fifteen there's an eighty five thousand dollar gain on sale of that machinery to the unrelated party and then you have to determine the character of the game well on the machinery actually originally cost two hundred and fifty thousand but they claimed a hundred and thirty-five thousand of depreciation on the machinery so remember from your past chapter that you you that's going to be a 1231 asset and to determine the character of the gain of the 1231 gain since this is a 1245 asset a section 1245 asset to the extent of depreciation the lessor of the gain or the accumulated depreciation is going to be it's going to change the character of the 1231 gain from capital to ordinary so the smaller of the accumulated depreciation of 135 and the gain of 85 is 85 so the entire $85,000 gain is going to be ordinary in character and then in and then they're gonna pay tax on that then in step 2 they use $60,000 in cash that they received from the sale of the machinery to pay their creditors and then because they owed their creditors $60,000 and so that leaves them with 200,000 in cash that they got from the outside party - 60 thousandths that leaves them with a hundred and forty thousand then in Step three they distribute the remaining cash and the stock - which is a capital asset in the hands of the Corp - Randy and Abel recognizes a $50,000 capital gain on that distribution and that's equal to the fur market value of the stock which is 125 - the basis of 75 so that's a $50,000 capital gain assuming a 34 percent tax rate that evil has on its taxable income it's gonna pay forty five thousand nine hundred dollars in taxes which is the $85,000 ordinary gain from sale of machinery plus the $50,000 capital gain from sale of stock times thirty four percent they're gonna pay that to the IRS which is shown down here and and then in step in the next step in step four this tax payment reduces Abel's remaining cash to one hundred and forty four thousand one hundred which is fifty thousand plus two hundred thousand dollar sales proceeds minus sixty thousand dollars paid to creditors remember they already had fifty thousand in the bank minus forty five thousand nine hundred paid in federal income taxes so the the remaining cash is is the dip is the sum of all that one hundred and forty four thousand one hundred and then they distribute that remaining cash to Randy Randy recognizes a hundred and sixty nine thousand one hundred dollar gain on that sale on that distribution which is deemed to be the sum of the hundred and forty four thousand.

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