What Is a Cash Liquidation Distribution?

Mary McMahon

A cash liquidation distribution is a return of capital to investors performed during the liquidation of a corporation. People who invested in the company receive payments of their original principal as part of the process of partial or total liquidation, which may be supervised by a trustee. It must be declared on taxes, but is not considered taxable because it isn’t income, only a return of principal. The corporation should provide the investor with a form to use on tax declarations with information about the money.

Man climbing a rope
Man climbing a rope

Companies may liquidate in association with bankruptcy proceedings, where they can no longer stay open and do not have the ability to reorganize. They can also decide to close, dissolving their holdings and returning principal to original investors. The cash liquidation distribution may include funds above the original principal, based on the percentage owned, in which case people do need to pay taxes on those, because they are considered income. Forms should have information taxpayers can use to accurately declare the information and file their taxes correctly.

Also known as a liquidating dividend or liquidating distribution, this includes only cash. The person in charge of liquidation sells assets to convert them to cash in order to return it to the various investors involved. Non-cash liquidation distribution can also occur, in which case the paperwork should include the fair market value so people can include it on their taxes.

When an investor receives a cash liquidation distribution, the paperwork should be carefully checked to make sure it is correct. If it is not, this should be addressed as soon as possible to make sure it will be accurate in time to file taxes. The documentation can also be checked against the investor’s own records. A point of contact with the company can answer questions and respond to concerns about the cash liquidation distribution.

It is also possible to view the documentation associated with the liquidation, distribution of assets, and repayment of debts. People who want to know how the process was performed can ask to see this information. If there are questions about propriety or accuracy of the proceedings, these can be brought up with the company’s contact, who is accountable to the investors during the liquidation process. Investors should be prepared for meetings with their own copies of paperwork, lists of questions they want to ask, and any documents they wish to question.

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