Tax treatment of liquidating distribution

11-Jun-2016 20:57 by 4 Comments

Tax treatment of liquidating distribution

A business trust is either treated as a corporation or partnership for federal income tax purposes.Since the business assets are deemed to have been distributed to the owners and then transferred to the liquidating trust, there will be an immediate recognition of a gain or loss from liquidation of the former business by the owners.

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In addition, it may be prudent for the fund manager to set aside certain cash reserves before making final distributions to the fund owners.Generally, a partner recognizes gain on a partnership distribution only to the extent any money (and marketable securities treated as money) included in the distribution exceeds the adjusted basis of the partner's interest in the partnership.A partner does not recognize loss on a partnership distribution unless (1) the adjusted basis of the partner's interest in the partnership exceeds the distribution, (2) the partner's entire interest in the partnership is liquidated and (3) the distribution is in money, unrealized receivables or inventory items.See so that funds may be passed to individual shareholders as dividends. Higher rate taxpayers may prefer to receive capital if possible because of the lower rates of CGT.Distributions made on striking off Transactions In Securities HMRC can use the Transactions In Securities (TIS) anti-avoidance rules to counteract an income tax advantage for a shareholder in certain circumstances.Also, if the time period is unreasonably prolonged, the status of the entity may change from a liquidating trust.

If a trust is created outside of Chapter 11 of the Bankruptcy Code, a private letter ruling may be requested if conditions of Revenue Procedure 82-58 are met.This can result in an otherwise capital receipt being taxed as income.In particular, from 6 April 2016 the definition of a TIS is extended to include: A Targeted Anti-Avoidance Rule (TAAR) has also been introduced to target ‘phoenixing’.Download PDF When "Liquidating Trust" is mentioned, most people associate this with bankruptcy.In a bankruptcy, a liquidating trust may be formed whereby certain assets are placed in a trust for the benefit of creditors who may have certain claims against those assets.The trust will be considered a liquidating trust with the primary purpose of liquidating its assets.

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