In the ruling, a corporate taxpayer had been incorporated in a state on a particular date, let’s say January 19, 2007.
The company was “administratively dissolved” some time after, for example, effective January 25, 2008, due to its failure to timely pay state franchise taxes.
At issue is whether the company’s status as a corporation had been terminated by the administrative dissolution. Something else to consider is that under Section 336(a) of the tax code, a gain or loss is recognized by a liquidating corporation on the distribution of its property in complete liquidation, as if such property were sold to the distributee at its fair market value. 142 ) states that “…where a corporation ceases business operations, has retained no assets, has no income, and has actually liquidated, there is in effect a de facto dissolution, even though the corporation has not been formally dissolved…” In addition, it is entirely possible for the corporation to continue in existence even though it has been, as a matter of state law, dissolved.
If it is considered terminated, the company would have been viewed as having completely liquidated, and both it and its shareholders would have experienced the tax consequences attendant to the situation. In other words, in most cases, the liquidation of a corporation commonly engenders two levels of taxation: tax will be imposed at both the corporate and distributee shareholder levels.* The De Facto Company Closure A complete liquidation is not always accompanied by a formal or legal company shutdown. Thus, unless dissolution brings about an automatic transfer of the corporation’s assets to its shareholders, the corporation, even though dissolved, continues its existence.
A fine line exists between definitions of a corporate liquidation and dissolution.
But for tax purposes, the defining line can make a big difference.
They also include provisions on the timing of basis adjustments, basis computations during a loss year, computation of individual stock basis and the categorization of debt as basis.