Question

Explain the tax advantages to the shareholders of a corporation that intends to liquidate by adopting a plan of liquidation, selling its assets in an installment sale, and then distributing the installment obligations to its shareholders?

Answer 1

The tax advantages to shareholders of a corporation that liquidates through an installment sale and distributes the installment obligations include capital gains tax deferral, reduced tax rate on installment sales, and qualified dividend treatment.

Step-by-step explanation:

The tax advantages to shareholders of a corporation that intends to liquidate by adopting a plan of liquidation, selling its assets in an installment sale, and then distributing the installment obligations to its shareholders include:

1. Capital gains tax deferral: When a corporation sells its assets in an installment sale, the gain is recognized over time as payments are received. This allows shareholders to defer paying taxes on the entire gain until they receive the installment payments, potentially allowing them to spread the tax liability over several years and potentially paying taxes at a lower rate.
2. Reduced tax rate on installment sales: If the proceeds from the installment sale exceed the corporation's basis in the assets, the excess is treated as capital gain. Capital gains are generally taxed at a lower rate than ordinary income, resulting in potential tax savings for shareholders.
3. Qualified dividend treatment: If the corporation distributes the installment obligations to its shareholders as dividends, the shareholders may qualify for the lower tax rates applicable to qualified dividends, further reducing their overall tax liability.