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It’s the final step in a corporate termination and the point at which IRS tax consequences start to apply.

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Your basis increases and decreases over the years for required adjustments to arrive at adjusted basis -- the amount you'll use to calculate gain or loss after the liquidation.

For example, increasing adjustments are made for additional contributions you make and to reflect your share of partnership income, whereas decreasing adjustments are required for partnership losses and profit withdrawals.

In addition to writing web content and training manuals for small business clients and nonprofit organizations, including ERA Realtors and the Bay Area Humane Society, Lohrey also works as a finance data analyst for a global business outsourcing company.

When a business operates as a partnership, the partners each report a percentage -- which is usually the same as their percentage of ownership -- of annual earnings on their personal returns.

Internal Revenue Service Form 1099-DIV, Dividends and Distributions, is a recordkeeping document that shows stock distributions received during the year.

While corporations most often issue 1099-DIVs to report stock dividend distributions, it can also be used to report nondividend distributions, including money a corporation returns to an investor during the liquidation process.

As a result, the tax effects of a partnership that makes liquidating distributions only impacts the partners who receive them.

To be taxed as a liquidating distribution, however, a partner's interest in the partnership must terminate.

Corporations can fold either by dissolution or complete liquidation.

Dissolution is an “administrative” termination of the corporation and while it is a usual first step, it doesn’t necessarily mean the corporation is folding.

Section 331(a) of the IRS tax code says that if a shareholder is eligible to receive a cash liquidation distribution totaling 0 or more, the distribution must be reported on Form 1099-DIV.

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