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Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 300
Experience:  Former IRS Revenue Agent
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I am just reading a previous question on tax consequences of

Customer Question

Good morning. I am just reading a previous question on tax consequences of liquidating a C corporation. I have a situation with very similar circumstances.
JA: The Accountant will know how to help. Please tell me more, so we can help you best.
Customer: I have a client that died in 2015 with a virtually empty C corporation. A little cash, $4,000, a loan to stockholder of $92,493 and retained earnings of $95,964. Trying to determine how to proceed with liquidating the corporation and the tax impact.
JA: Is there anything else the Accountant should be aware of?
Customer: I don't believe so.
Submitted: 2 months ago.
Category: Tax
Customer: replied 2 months ago.
Please feel free to email me if you need any additional clarification. Thank you.
Customer: replied 2 months ago.
Book value of common stock, $1,000.00.
Expert:  Dr. Fiona Chen replied 2 months ago.

Dear Accountant,

1) The important question is that who are the current shareholders and who might have in status inherited the shares (ownership) of this corporation. That is who is the audience and the client of the accountant. This part needs to be seriously handled.

2) It is very hard for a C Corporation actually be "empty". There could be client list, business reputation, good will, not to say inventory, etc. The first step in trying to continue the corporation (to close it down is a step and a process in the step). A corporation which has had accumulated earning of 95,964 has some value. This value needs to be considered and valued. It is advised that we don't throw it away or just close it down. We may be liable in the future even if we are just the accountant.

3) In terms of tax due for the c corporation. This corporation when being closed down may owe accumulated earning tax because it has dividends undistributed. However, we don't have to volunteer this tax. Usually, this tax is assessed by the IRS.

4) When we close the business down or close its book, we cannot just forgive the debt. So, the 95,964 should be distributed as dividend. The owners owed 92,493 needs to be paid back. Well, the book is not balanced. Assuming it is balanced, then, 4000+95,964 is the actual money left for this company to distribute as dividend to the shareholder(s), whether the money owed by the shareholders is returned back to the company or not.

5) These two pieces of items of accumulated earning, 95,964, dividend due to shareholder, and 92,493, debt to be collected from the deceased are relatively huge items in someone's estate. If we forgive the debt, 92,493, the deceased may have a regular income up to that amount. If we distribute the dividend, that is long-term capital gain.

There is huge liability for the accountant's wisdom. The accountant's audience and customer will need to participate on what to do.

Also, depending on this tax return and business' relationship to other businesses or anyone else inherited this business, if examined, as it is now, the corporation is facing reclassification of undistributed earning of 95,964 from loan to wages. Then, the corporation and the individual, even deceased, is facing the liability of payroll taxes. If not, for the undistributed dividend without a legitimate long term business plan, this tax return is facing accumulated earning tax.

The current accumulated earning tax rate is 20% of the taxable income accumulated and not distributed timely.


Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP

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