Liquidating dividend tax

WHETHER PLANNING FOR A LIQUIDATION of their own professional practices or advising clients about the liquidation of a commercial organization, CPAs will find that the problems and the solutions associated with each are likely to be the same.

awyers advise CPAs to have employment and noncompete agreements in their accounting practices.

In the cases discussed in this article, the Tax Court did not distinguish between personal service corporations, such as CPA firms, and commercial organizations, such as an ice cream distribution company, in identifying the individual ownership of customer-based intangibles.

In planning for a liquidation of their professional practice or advising clients about the liquidation of a commercial organization, CPAs will find that the problems and the solutions are likely to be the same.

By far the largest element of value in a profitable professional practice is the intangible .

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.

This apparent contradiction presents some questions to which there are no black-and-white answers.

The IRS determined their firm had realized a 8,000 gain on liquidation of its goodwill and Norwalk and De Marta, as shareholder partners, realized capital gains from the distribution of the goodwill.

The IRS argued that when the corporation was liquidated, it distributed to its shareholders “customer-based intangibles” in addition to tangible assets.

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