I'm the sole and original stockholder of a C corporation. Capitalized in 2001 w/$100 cash for 100 shares common. I contributed add'l cash as "Additional Paid-In Capital" in 2004, now stands at $48,000. Retained Earnings is deficit ($30,866). By 12/31/08, it had ceased operations, sold all assets at book value and satisfied ALL liabilities. No cash or property was left to distribute to shareholder. As of 12/31/08, 1120 Sch L: line 15=$0, line 22b=$100, line 23=$48,000, line 25=$-30,866, line 28=$17,234. So line 15 and line 28 don't balance.

I now wish to complete its voluntary dissolution and file form 966 along with its 1120, but I don't know how to treat this on the 1120. Since there is no cash or property to disribute, Sch M-2 lines 5a,b,c don't work. Should I record a $17,234 liquidating distribution on M-2 line 6? If so, then M-2 line 8 increases its deficit to -$48,100. This would then make Sch L line 25 be -$48,100 and decrease Sch L line 28 to $0, which would then balance with Sch L line 15. Would this liquidating distribution be a non-taxable return of capital? Would this liquidating distribution create a capital loss for me? If, so, what would the amount of such loss be? Does it require the issuance of a 1099-DIV to me? Where would I report it on my 1040 Sch D?

Or, is there another more simple way of accounting for a voluntary dissolution. For instance, instead of a liquidating distribution, could the company simply buy my now worthless stock for $0.00, which then allows me to take a capital loss equal to the difference between the Additional Paid-In Capital and the Retained Earnings, which would be $17,134. This seems like a better way, perhaps. Thank you very much !

Generally speaking, in the final year of the corporation tax return, the balance sheet is actually zero'd out! So, you should not have any concerns with respect to the balance sheet.

What I suggest is that you contact your CPA or tax professional to determine whether or not you can deduct capital losses on the loss that you personally sustained on the liquidation of the corporation. I suspect that you have sustained a capital loss and would be entitled to take a capital loss on Schedule D. But, please discuss this possibility with your tax professional.

Again, mark the return as FINAL on both the State and Federal tax return and your software program would eliminate the ending balance sheet to Zero!

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thank you Tax Guru. I appreciate your reply.