Report cash liquidating distributions
In a professional practice, tangible property such as office equipment, furniture and fixtures makes up a small portion of a firm’s total value.
By far the largest element of value in a profitable professional practice is the intangible .
The corporation recognizes income on the excess of fair market value over adjusted basis.
The shareholder, who treats the fair market value of the property as received in exchange for his or her stock, also recognizes a gain (IRC section 331(a)).
The critical issue for tax planning is whether the assets distributed are considered property under IRC section 336 and whether the corporation owns them.
The IRS position is that these intangibles are the firm’s assets and the firm realizes taxable gain when it distributes them to shareholders.
Further, according to the IRS, when the firm transfers such intangibles to shareholders, they also realize taxable gain.
The IRS asserts that distribution of “clients and customer-based intangibles” to shareholders is taxable, but the Tax Court has held that it isn’t if a noncompete agreement between the shareholder or employee and the firm does not exist.