Final answer:
When Texas Corporation liquidates through series of distributions to its shareholders after adopting plan of liquidation, the distributions are taxed differently depending on whether they are considered return of capital or dividend.
Step-by-step explanation:
When a Texas Corporation liquidates through a series of distributions to its shareholders after adopting a plan of liquidation, the distributions are taxed differently depending on whether they are considered a return of capital or a dividend. A return of capital is not taxable to the shareholders and reduces their basis in the stock, while a dividend is taxable as ordinary income.
The amount of the distribution that is considered a return of capital is determined by the shareholder's basis in the stock. If the distribution exceeds the shareholder's basis, it is treated as a capital gain.
For example, let's say a shareholder has a basis of $10,000 in the stock and receives a distribution of $15,000. If $10,000 of the distribution is considered a return of capital, it is not taxable. The remaining $5,000 is treated as a dividend and is taxable as ordinary income.
It's important to note that each shareholder's tax situation may be different, so it's recommended to consult with a tax professional for specific advice.