Tax consequences liquidating corporation
Since a liquidating distribution is a deemed sale of all corporate property, the IRS may seek to value the company as a going concern, if a shareholder continues the business as a sole proprietorship, prietorship, with a resultin valuation in excess of the aggregate vlaue of the company's identifiable assets. 1060 applies to the deemed sale, it is possible that an allocation to goodwill or going concern value would be required, increasing the corporate and shareholder tax burden. 1060 Under pre-TRA law, there existed a competing interest between buyers and sellers in the allocation of purchase price in asset purchases.In this regard, it is necessary to consider the applicability of Sec. Sellers generally benefited from a larger allocation to capital assets, including goodwill or going concern value, because of preferential capital gains taxation.The corporate level gain will increase from 5,000 to 5,000, and the corporate level tax will increase by ,400 (0.34 X 0,000). 1060 also requires that the transferee's basis be determined solely by reference to purchase consideration.
However, the deemed sale created by a distribution may produce valuation problem not present in an actual sale to a third-party purchaser.When the TRA eliminated preferential capital gains taxation, selles could be expected to be indifferent to how a lump-sum sales price was allocated, since this allocation generally no longer had an effect on their tax liability.As a result, Congress was concerned about potential abuses in purchase price allocations, with particular emphasis on the assignment of value to goodwill or going concern value. 1060, which mandates the use of the "residual method" of valuation to asset acquisitions. 1060 applies to any "applicable asset acquisition," which is defined as any direct or indirect transfer of assets that constitute a trade or business in the hands of either the seller or the purchaser, and with respect to which the transferee's basis is determined solely by reference to the consideration paid for the assets. 1060 define a group of assets to constitute a trade or business if -- the use of the assets would constitute an active trade or business for purposes of Sec. 338 temporary regulations, the residual method allocates the purchase price to identifiable tangible and intangible assets, up to their FMV, with any remainder allocated to goodwill or going concern value.Buyers generally benefited from a larger allocation to depreciable tangible assets or amortizable intangible assets, with goodwill or going concern allocations avoided to the extent possible.This adverse interest between the buyer and seller gave the allocation of a fixed purchase price to individual assets a measure of credibility.