You don’t have to adopt a formal plan of liquidation to get liquidation treatment. If a corporation effectively ceases business and distributes all its assets, the IRS may treat it as a de facto liquidation. Rendina v. Commissioner, T.C. Memo 1996‑392.
Rendina and Ackerman formed a corporation to build 18 condominium units. They sold 16 units and had two left. Instead of formally liquidating, they orally agreed that the corporation would transfer the last two units to Rendina in exchange for his assumption of corporate debts. The corporation then ceased business and was later revoked.
The Tax Court held that this was a de facto liquidation. The court applied a three‑prong test from Estate of Maguire v. Commissioner, 50 T.C. 130 (1968): (1) manifest intention to liquidate, (2) continuing purpose to terminate corporate affairs, and (3) activities directed toward that objective.
The court also had to decide whether Rendina’s deposits into the corporation were debt or equity. The court held they were equity (no interest, no fixed repayment date), so they increased his stock basis. And his assumption of corporate liabilities reduced his amount realized.
The lesson: if you want liquidation treatment, you don’t need a formal plan, but you do need to show a clear intention to liquidate and actual cessation of business. If you just transfer assets informally and keep the corporation alive, the IRS may treat the transfers as dividends rather than liquidating distributions.
This article is for general informational purposes only and is subject to change. Tax laws are complex and vary by situation. You should consult a qualified professional for advice specific to your circumstances. For questions, contact Alan Goldstein.
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