Where to report non-taxable dividend?

[Catherine]

Client owned a c-corp which was sold in 2012. Sale was reported on 1120 (which I don't do for this company) and client was issued a 1099-DIV with proceeds in Box 8 (liquidating distributions). Well, those are not taxable at the personal level. Yet we *know* that if I don't report it first thing client will get is a mis-match letter demanding additional taxes.

So, is it better to report this on Line 21 with an additional line backing the amount out again as "Taxed on Form 1120" -- or on Schedule B as dividend paid and then backed out again as taxed elsewhere? Or does it really matter, so long as it goes somewhere?

TIA,

Catherine

[joanmcq]

They'll match on Sch B. I'd do it as dividend received and use the 'adjustments' box.

[Catherine]

Thanks -- that was my thinking but I wanted a second (third, fourth, nineteenth) opinion.

[jklcpa]

Client owned a c-corp which was sold in 2012. Sale was reported on 1120 (which I don't do for this company) and client was issued a 1099-DIV with proceeds in Box 8 (liquidating distributions). Well, those are not taxable at the personal level. Yet we *know* that if I don't report it first thing client will get is a mis-match letter demanding additional taxes.

So, is it better to report this on Line 21 with an additional line backing the amount out again as "Taxed on Form 1120" -- or on Schedule B as dividend paid and then backed out again as taxed elsewhere? Or does it really matter, so long as it goes somewhere?

TIA,

Catherine

The amount in box 8 can be taxable and treated like a sale or redemption of the owner's stock if the amount received exceeds the basis, and then it is taxed as a capital gain on Schedule D. What happened to the owner's stock?

[Catherine]

The amount in box 8 can be taxable and treated like a sale or redemption of the owner's stock if the amount received exceeds the basis, and then it is taxed as a capital gain on Schedule D. What happened to the owner's stock?

Sold to new owner -- who set up new company, new EIN, same name, same type of business. All gain was taxed at the 1120 level -- I have copies of the past two years' returns showing same. Matches the gain I had calculated from sale price and owner's original purchase in the early 90's, minus expenses of selling I did not have.

[KEYWEST_RICKS]

If the corp sold all of the assets to a new owner then i believe there would be tax on that transaction. sales price vs basis in assets

if the corp then liquidated and distributed cash to the shareholder in exchange for the shares then i believe there would be tax on that transaction also. distribution amount vs basis in shares

maybe section 1202 applies for small business stock

Double taxation with a c corp though right??

If the owner simply sold his shares in the c corp to another then i would think only one level of tax.

Jeff

[michaelmars]

its a schedule D transaction offset by basis. Liquidating distributions isn't a sch B item

[kcjenkins]

Cat, I think Michael is right, even tho Joan's answer is "logical", it's not right for a Liquidating distribution.

[jklcpa]

Yes, that's what I was trying to say last night, at some point the shareholder has to recognize gain on the sale/liquidation of his shares. Cap gain treatment is why a stock sale of a C corp is more desirable from the seller's point of view rather than selling the assets.

Just as an example because I'm not sure if this is what happened in Catherine's case, even if a corp does a tax free exchange of its stock for stock in the purchaser's new corp so that purchaser gets a step up on the assets, and then sells those shares in new corp, the shareholder's basis remains the same and cap gain is the proper treatment on the shareholder's return.

[Catherine]

So if I am understanding what jklcpa, KC, and michaelmars are saying...

Even though the sale was fully reported *and* taxed at the corporate level (4797 gain on Line 9 of 1120 and capital gain on line 8 of 1120), it is also/still/additionally taxed at the personal level? As a Schedule D, to the extent of basis?

If this is so -- then what do I do about the fact that the (former) shareholder only got about half the money in 2012? They held on to money past the end of 2012 into early 2013 because of some license transfer delay.

It's a good thing I have a nasty headache today, as this return would be giving me one right about now. The current one, however, is bad enough that a little more is down in the noise level.

[michaelmars]

ITS Either an installment sale or you allocate the cost basis or you can take the full cost now this year and 2013 will be 100% gain

[jklcpa]

That's the double taxation problem with C corps when a sale is structured as an asset sale, and the income is taxed as ordinary income, usually at the highest rate. And then when the funds are distributed in payment of the owner's stock, it's taxed again as the capital gain. That's why I asked what happened to his stock, how it was disposed of. It sounds like this was really an asset sale where the cash went into the corp, the corp recognized the sale of assets being sold on 4797, and then the corp paid the shareholder the cash to liquidate/redeem the shares. Is that what happened?

>>as a Sch D to the extent of basis<<

No, the total liquidating distribution is treated just like proceeds of sale of stock sold through a broker. The amount in box 8 does not belong on Sch B, and it is not nontaxable if you were thinking it is the same as a return of capital. In your case because the stock was owned since the 1990s, the excess over basis will be a long term cap gain. If all of the funds were received in one year, you'd report the full amount as proceeds and the full cost/basis on Sch D. In this case, I agree with Michael that you'll have to decide about either reporting it as an installment sale over the 2 periods, or you'll allocating basis to be applied against the amounts received in each year.

[Catherine]

I am SO very glad I posted this question here. I had used my tax research subscription and IRS dot gov search, and got absolutely nothing useful except that 1099-DIV Box 8 was not taxable (in two different references). That seemed very odd, but since that was all I could find, that was what I was going by.

I have an inquiry to the client on how much they got in 2013 (I think it's all paid off now -- again, there was a holdback because of a delay in some weird license transfer that took months), and either split the basis of claim it all this year and use a zero basis next year. That might depend on which year got the biggest chunk of cash.

[jklcpa]

Google "asset sale vs stock sale C corp" and you'll get lots of good info, but not specifically about the box 8 handling. The double tax is why the seller prefers a stock sale because it's one tax at the shareholder level at cap gain rates. Asset sales are what the purchaser wants so they get the step up in basis of depreciable assets, and they usually don't assume the debt or have the potential headaches of issues like product liability and warranty issues, contract disputes, and employee lawsuits.

[Catherine]

Not much in assets here; office is rented and there are a few desks and computers. What they actually bought was the "book of business" including corporation name and reputation, contacts, client and vendor lists.

[jklcpa]

I have an inquiry to the client on how much they got in 2013 (I think it's all paid off now -- again, there was a holdback because of a delay in some weird license transfer that took months), and either split the basis of claim it all this year and use a zero basis next year. That might depend on which year got the biggest chunk of cash.

Check out this link to IRS manual for its auditors, specifically 4.11.7.5 Shareholder's Gain or Loss. If a series of payments are received, the basis is fully recovered first before reporting the gain, or if a loss then it is not allowed until the final amounts are received. In your case, you'd apply basis up to the amount distribution for 2012, and the remainder of the basis would be applied against the amount in 2013. Something was bugging me about the installment sale issue, so I looked a little further. It's still a cap gain transaction though.

http://www.irs.gov/irm/part4/irm_04-011-007.html

From Pub 550 -

Liquidating Distributions

Liquidating distributions, sometimes called liquidating dividends, are distributions you receive during a partial or complete liquidation of a corporation. These distributions are, at least in part, one form of a return of capital. They may be paid in one or more installments. You will receive Form 1099-DIV from the corporation showing you the amount of the liquidating distribution in box 8 or 9.

Any liquidating distribution you receive is not taxable to you until you have recovered the basis of your stock. After the basis of your stock has been reduced to zero, you must report the liquidating distribution as a capital gain. Whether you report the gain as a long-term or short-term capital gain depends on how long you have held the stock. See Holding Period in chapter 4.

Stock acquired at different times. If you acquired stock in the same corporation in more than one transaction, you own more than one block of stock in the corporation. If you receive distributions from the corporation in complete liquidation, you must divide the distribution among the blocks of stock you own in the following proportion: the number of shares in that block over the total number of shares you own. Divide distributions in partial liquidation among that part of the stock redeemed in the partial liquidation. After the basis of a block of stock is reduced to zero, you must report the part of any later distribution for that block as a capital gain.

Distributions less than basis. If the total liquidating distributions you receive are less than the basis of your stock, you may have a capital loss. You can report a capital loss only after you have received the final distribution in liquidation that results in the redemption or cancellation of the stock. Whether you report the loss as a long-term or short-term capital loss depends on how long you held the stock. See Holding Period in chapter 4.

[Catherine]

Thank you SO very much!

[windmill]

Very interesting thread. Haven't ever had this situation. It is good we have this board to refer to as I am a one person shop and sometimes need other opinions and references. thanks for helping Catherine.