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We started a C Corporation three years ago and have contributed both equity and debt. We believe that we are going to be selling the company in the next 12 months and are wondering what the protocal is for paying out the shareholders and the tax reporting requirements. If the company is sold, we believe that bondholders will be paid first and then equity shareholders second but aren't sure how it is reported? If an equity holder is also a bondholder do they receive a 1099 or W-2 form?


Expert Todd Alexander's Answer:

There are several reporting requirements to be followed, such as final employment tax returns, W-2s, capital gains/losses and 1099s for shareholders as well as reporting the dissolution to the IRS.  Below are the IRS requirements as stated in the Internal Revenue Manual (IRM): (12-01-2004)
Filing Requirements



  1. In cases involving the examination of a liquidated corporation or its shareholders, the following steps should be taken to ensure that all filing requirements have been met:

    1. Check whether Forms 1099-DIV were filed for all shareholders receiving distributions in the amount of $600 or more in a single calendar year. If not, consider the applicability of penalties. Examiners are required to secure all unfiled Forms 1099 and process them through the Submission Processing Center. Consideration should be given to coordinating with Planning and Special Programs (PSP) to determine whether a project should be started on the individual recipients of the Form 1099 income. Generally, these cases are best worked by correspondence or by office examination.

    2. If dividends were paid to foreign parties, verify that Form 1042 was filed.

    3. Verify that Form 966, Corporate Dissolution or Liquidation, was properly filed and inspect the form.

    4. In Rev. Proc. 90-52 the Service issued a checklist questionnaire detailing the information to be included by taxpayers in submitting ruling requests for liquidation of subsidiaries under IRC section 332. Examiners may wish to refer to the checklist as an information source when examining cases involving liquidation issues.

    5. Rev. Rul. 71-129 states that a corporation that has completed liquidation is considered dissolved, and must file its return and pay the tax due thereon for the short period on or before the fifteenth day of the third full month following the dissolution.

    6. The following documents are typically prepared by corporations in the process of liquidating. The examiner should request these documents and inspect them for any irregularities/unusual items:


    A resolution adopted by directors recommending corporate liquidation;
    A resolution adopted by shareholders approving the directors' recommendation;
    A resolution adopted by directors authorizing the directors and officers to take all necessary steps to carry out the plan of complete liquidation;
    The plan of complete liquidation;
    The corporation's final tax returns; and
    Statements furnished to shareholders detailing the fair market values of the assets that were distributed to the shareholders.

Todd Alexander, CPA


20 yrs experience

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