I am a member of a Pennsylvania S-Corp that went out
of business in 2005. I continue to file 1120 returns, but
would like to officially dissolve the entity. My problem
relates to the balance sheet. We have no assets, but
$4.6 million in liabilities that will never be paid. If
I file the 966 return, do the unpaid liabilities become
income to the shareholders?

Be careful. In Vermont signing off on the corporate dissolution means that you have accepted personal responsibility for the debt. At this point do not do anything until you hire a lawyer and an accountant.