Tax on liquidating dividend

Liquidation is generally accomplished by either selling these assets or transferring all of the shares in the corporation.

Possible reasons requiring liquidation are the closing or sale of the business or changing the business structure to provide more favorable tax treatment.

As part of every liquidation, state and federal income, payroll and capital gains taxes must be paid at both the corporate and individual levels.

A C corporation is a business entity governed by Subchapter C of the Internal Revenue Code.

Corporations are the most widely known business forms, providing limited liability to shareholders and allowing ownership to be freely transferred through the buying and selling of stock.

If the company has a dividend reinvestment program that allows the shareholder to reinvest the dividends by buying additional shares at discounted prices, then the difference between the fair market value of the shares minus the discounted prices is taxable as a dividend, in addition to the dividends that were used to purchase the discounted stock.

Dividends are reported to the Internal Revenue Service () and to the receivers of the dividends on Form 1099-DIV, Dividends and Distributions.

Some distributions that are called dividends are actually considered interest, such as the distributions received from building and loan associations, cooperative banks, savings and loan associations, credit unions, and mutual savings banks.

These distributions are reported on Form 1099-INT, Interest Income.

Interest in the form of an original issue discount, such as original issue bonds sold for less than par value, is reported on Form 1099-OID, Original Issue Discount.