Checklists: Corporate Liquidation and Deferred Like-kind Exchange under IRC Sec 1031

For this issue of Main Street Practitioner, we feature two important checklists which iclude information in response to frequently asked questions submittd to the NSA Tax Help Desk.

Corporate Liquidation Checklist

The following list of items can be helpful in finalizing a corporate entity and filing all of the documents in that final year.

  • Determine a date of liquidation that works best for corporate and shareholder tax planning.
  • File a final corporate tax return (Form 1120 or 1120-S) – mark the “final” box on Page 1.
  • File any final state or local paperwork that will finalize the corporate charter.
  • Plan for the due date of the final tax returns – normally 2 ½ months after the final month.
  • Draft a plan of liquidation or add references to the liquidation in the company ‘minutebook’.
  • File the Form 966 with the IRS – this form has a “within 30 days” of the liquidation plan due date, but appears to be accepted with the “final” tax return.
  • Complete a Form 1099-DIV for any liquidating distributions to the shareholders.
  • Remember the Form 4797 within the “corporate” tax return to report the gain/loss on the distribution of any appreciated/depreciated property.
  • Deduct any unamortized costs remaining on the corporate books, ie start-up or goodwill.
  • Deduct any legal or accounting fees for the liquidation and/or final returns.
  • Review any debts, mortgages or liabilities of the entity and have shareholder take the proper steps to resolve the amount owed or transfer them personally to the shareholders.
  • Write off any basis in any abandoned assets or worthless inventory that was not distributed.

This list is certainly not every possible issue or event that a corporate entity will encounter in wrapping-up all of the affairs it may encounter – but it is a nice list to review with the owners as they consider that final year of their corporate entity.

Deferred Like-kind Exchange under IRC Sec 1031 Checklist

The like-kind exchange rules are strictly adhered to by the IRS and the Form 8824 is just part of that compliance. With a deferred exchange and the use of a qualified intermediary – there are other steps that are required to pull-off a successful exchange.

  • Identify and contract with a reputable like-kind exchange agent. A firm that specializes in the handling of deferred Sec 1031 based exchanges.
  • Verify and review the “exchange” contract documents – make sure that there are forms that deal with the replacement property needing to be “identified” before the end of the 45-day identification period.
  • Confirm that this document allows for the identification of more than one (1) replacement property – the IRS allows up to three (3) properties without regard to FMV or more than three (3) properties if the aggregate FMV does not exceed 200% of the aggregate FMV of the relinquished property(s).
  • The replacement property needs to be properly identified, with adequate property descriptions signed and properly disclosed and delivered to all parties to the transaction. This includes street addresses and “legal” property descriptions.
  • Confirm provisions in the contract terms that any changes, revocations of or to the replacement properties be properly documented and handled within the 45-day identification period.
  • Check for terms and conditions that the replacement property(s) will be delivered with proper title work by the end of the 180th day – the exchange period. And that this is substantially the same property that was “identified”.
  • The confirmation of documents and terms such as the “45-day identification period” and the “180-day exchange period” will confirm that you have a valid IRC Sec 1031 exchange agent and/or entity.
  • The relinquished property(s) need to be transferred to the “qualified intermediary”, the exchange agent prior to its’ sale.
  • The taxpayer cannot be in control or “constructive” receipt of the sales proceeds of the relinquished property. This will create a “sale” and eliminate the benefits of Sec 1031.
  • Confirm that the taxpayer will receive a copy of the “sales contract” – review of this document before the sale is not a bad idea – the taxpayer should not be listed as the direct seller of the relinquished property.
  • Obtaining the names and phone numbers of the parties involved, as well as the attorney, any settlement or escrow agent.
  • Obtain a relinquished property addendum to any contract offer or sale that the seller’s intent is to enter into a “like-kind” Sec 1031 exchange – allowing the contact to be that of the qualified intermediary or at least assignable to them.
  • Look for and/or confirm such documents as the “exchange and escrow account agreement”, a “notification of assignment” form, an ‘assignment of the replacement property” document and maybe even a copy of the Form 8824, etc… The existence of all or at least some of these forms and documents helps confirm things are being done right and compliance with the provisions for the IRC and the regulations are done.
  • The “qualified” escrow account should be confirmed – this account is used to avoid “constructive receipt” of sales proceeds and “limits” the use of the funds to the exchange. Thus preventing there pledge, use or borrow for any other purpose.
  • Document the existence of any “related parties” involved in the exchange. This does not violate the tax-free exchange but will result in additional disclosures and post-exchange holding periods.
  • Finally – review the Form 8824 and make sure that each and every question can be answered and filled-in from the documents provided by the qualified intermediary. There contracts and documents should allow for this form to be completed in its’ entirety – if not, something just might be missing.

This list is not all-inclusive and is designed to be a guide and not full compliance with either the IRS Code and/or regulations or a qualified intermediaries procedures. State and local real estate laws can also change, add to or delete any of the provisions of a Sec 1031 exchange – so again consultation with experts in this field before entering into an exchange is always advisable!

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