The character of the gain recognized (capital versus ordinary) depends on the character of the property distributed. 336, a liquidating C corporation must recognize gain or loss on distributions of property to the shareholders as if the property had been sold to them for its fair market value (FMV). The following is a brief general discussion of the tax treatment of a C corporation liquidation. Even with the lower 21% corporate federal income tax rate (effective after 2017), double taxation can be prohibitively expensive. 336 and another tax to the shareholders under Sec.
The liquidation of a C corporation with appreciated assets can potentially result in double taxation - a tax to the corporation on the distribution of assets under Sec. The conversion of a C corporation into an LLC is treated as a complete liquidation of the corporation for tax. Interests in the LLC did not meet the requirements to be qualifying employer securities. 2014- 31, the Tax Court disqualified an ESOP established by a corporation that subsequently converted to an LLC. Warning: The conversion of a corporation into an LLC classified as a partnership can have unexpected and unintended results.
However, in certain situations, a conversion to LLC status may be beneficial. Although a conversion allows the C corporation shareholders to continue to have limited liability while acquiring the advantages of passthrough taxation, the tax cost of the conversion normally will be prohibitive. Only infrequently will it be beneficial for a C corporation to convert into a limited liability company (LLC).
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