 Hello, and welcome to the session. This is Professor Farhad. In this session, we would look at introduction to corporate liquidation. This topic is covered in corporate income tax course, the CPA exam, the regulation section. As always, I would like to remind you to connect with me on LinkedIn. YouTube is where you need to subscribe. I have over 1500 plus tax accounting and all the thing lectures. This is my Instagram account, Facebook, and this is my website. On my website, you could also donate if you'd like to support the channel. So let's talk about corporate liquidation. The first thing is we want to know why and how corporate liquidate. So think about it. Why corporate liquidate? Liquidate means why do they go out of business? Why would you go out of business? Well, one reason why you would go out of business, because your business is not successful. You are not generating cash flow. What you plan to do is not really working. The economy is going south. Somehow you are unsuccessful. That's one way to look, one reason to liquidate. Sometimes the shareholder wants to acquire the corporate asset. So you buy the asset and you liquidate the company. Or another person wants to buy you out. So another person or entity wants to purchase the corporation. How can they do it? They can buy the stock. They can buy the stock of the company, then liquidate the corporation. Basically, they will buy the stock then because they own the company, then they liquidate the corporation. Or they can buy the assets directly from the corporation. Rather than buying the stocks, they can ask you if you would sell your building, fleet of vehicles, supplies, assets, inventory, whatever you have, a count receivable. And after the assets are sold, the corporation distributes the sales proceeds to the shareholders. So after we sell those assets, we give the proceeds to our shareholders and we go out of business. Now we have to understand that we are dealing with complete corporate liquidation. And that's in contrast to non-liquidating distribution that we talked about in the prior chapter. So in the prior chapter, we looked at partial liquidation or non-liquidating distribution. So if you have any concerns about this topic or if that's the topic you are looking to learn about, that's the prior chapter. So when a corporation makes a non-liquidating distribution called a stock redemption, the entity normally continue operating, which continues as a going concern. So the company exists in a complete liquidation. That's totally different. In a complete liquidation, the company exists and terminates. It sees to exist, as well as the shareholder interest in the company. Basically, the company goes out, it's done. A complete liquidation is treated like a qualifying stock redemption, which is, if you remember from prior chapter, it means the transaction produces a sale or an exchange treatment to the shareholder. So what you're doing is you are selling your stocks. Basically, you are liquidating. It's a sale or an exchange. And because of that, you're going to have a capital gain or a capital loss. So let's take a look at a summary real quick about the difference between non-liquidating and liquidating distribution. For a corporation, if it's a non-liquidating distribution, if they have a gain, they can book the gain. If they have a loss, they cannot book the loss. So for a losses, you cannot gain. You can. If it's a liquidating distribution, you can recognize the gain and you can recognize the loss. I mean, oops, you can. Yes, you can recognize the loss. Yes, for both. Okay. Think about it for a moment. If you're going out of business, you want to account for your losses. There is no way for you to defer them any further. Okay. So yes, you can recognize the loss. Yes. For the shareholder, if a non-liquidating distribution, if it's, it will be treated as an ordinary income dividend up to EMP. Okay. This is a non-qualify stock redemption. If in a liquidating distribution, like a qualified stock redemption, you have a capital gain or a capital loss, capital gain or a capital loss basis for the shareholder. Well, what's your basis to the shareholder for, for the, for the distributed asset, fair market value of the distribution for the non-liquidating and fair value of the distribution for the liquidating, which is the same, same rules. Let's take a look at an example to see how this all works. Sunset corporation with EMP of 400,000 make a cash distribution of 120,000 to stockholder. The stockholder basis and sunset involve $50,000. Determine the tax consequences. Every distribution is a non-qualify stock redemption. So let's take a look at here. This is a non-qualify. So non-liquidating, non-qualified stock redemption. Okay. So if it's a non-qualify stock redemption, they gave us $120,000, guess what? That 100, since we have EMP, enough EMP, the $120,000 is considered what is treated as a dividend and we have plenty of EMP to be treated as a dividend. So this is a dividend. Determine the tax consequences. The shareholder of the distribution is a qualified, qualifying stock redemption. If it's a qualifying, it's like an exchange. It's a sale. Well, you sold something, you sold something and you received $120,000 and the basis for that something, your basis is $50,000. Therefore, you have a capital gain of $70,000. Determine the tax consequences to the shareholder of the distribution is a complete liquidation. Well, complete liquidation is like qualifying stock redemption, $120,000 minus $50,000 equal to $70,000 and that's treated as a capital gain. How much will you pay for it? Well, check out the chapter for capital gain, how capital gains are, how capital gains are taxed. If you have any questions about this topic, please email me if you happen to visit my website and I strongly encourage you to do so. Please consider donating. If you're studying for CPA, for your CPA exam, as always, study hard, it's worth it. In the next few session, we would look at the effect on the shareholder, much, much more in details and on the corporation, much, much more in details. This is the big picture, these are the general rules. Good luck and study hard for your CPA exam.