You Make the Call - Aug. 6, 2026

Question: Daniel’s C corporation adopts a plan of complete liquidation and distributes business property to its shareholders. What federal income tax and reporting consequences generally apply to the corporation?

Answer: When Daniel’s C corporation distributes the property, it generally recognizes gain or loss as though it sold the property to the shareholders for its fair market value (FMV). The corporation calculates the gain or loss by comparing the property’s FMV on the distribution date with its adjusted basis in the property.

The type of property Daniel’s corporation distributes determines the character of the recognized gain or loss. For example, depreciation recapture or other recapture provisions may require the corporation to treat all or part of the gain as ordinary income. In addition, §336(d) may limit the corporation’s ability to recognize a loss in certain situations.

However, exceptions may apply when a controlled subsidiary liquidates into its parent corporation under §§332 and 337, the liquidation occurs as part of a qualifying reorganization, or a cooperative housing corporation makes a qualifying distribution under §216(e).

As part of the liquidation process, Daniel’s corporation must file Form 966, Corporate Dissolution or Liquidation, within 30 days after adopting the plan or resolution to liquidate. It must also file a final Form 1120, U.S. Corporation Income Tax Return, and check the final return box. Subject to applicable exceptions, the corporation generally must file Form 1099-DIV, Dividends and Distributions, for each recipient receiving at least $2,000 in liquidation distributions during 2026.