8869. What tax considerations make the liquidation of an S corporation different than the liquidation of a C corporation?Alexis Longrcline202015-07-22T15:31:00Z2015-07-22T15:31:00Z23612064Summit Business Media1742421148869. What tax considerations make the liquidation of an S corporation different than the liquidation of a C corporation?IRC Section 1371 provides that an S corporation is subject to the same rules that apply in the context of a C corporation unless there is a specific rule that has been developed for S corporations. Despite this, one of the primary differences between an S corporation and a C corporation is their basic tax treatment, which has an important impact upon the issues that the entity will face during liquidation. Because S corporations are taxed at a single level, taxation of a sale or other liquidation of the business will usually occur only at the individual level, unlike in the context of the C corporation, where the corporation itself will be required to pay taxes on any gain before passing the profits through to shareholders, who will also be taxed on the amounts they receive.Many S corporation shareholders will have a higher stock basis than that of a C corporation shareholder. This is because the basis of an S corporation shareholder’s stock is increased by any earnings of the S corporation that are passed through for tax purposes..IRC Secs. 1367(a), 1366(a)(1)(A). Depending upon how long the corporation had existed as an S corporation, and the level of earnings that were passed through to shareholders, S corporation shareholders may have substantially higher tax bases upon sale. Because tax basis decreases the amount of gain that the shareholders are required to recognize upon sale, the S corporation shareholder’s total tax liability will often be lower than the C corporation shareholder’s upon liquidation of the company. If the S corporation was ever a C corporation, however, the S corporation will be required to account for any built-in gains, which are taxed at the highest rate applicable to C corporations (see Q 8825)..IRC Sec. 1374(b)(1). The tax on built-in gains is designed to preserve a part of the double tax structure for certain S corporations that were formerly C corporations. The built-in gains tax applies if the S corporation sells an asset within a ten year period following its S corporation election..IRC Sec. 1374(d)(7). The tax on built-in gains is imposed at the S corporation level, in addition to any taxes that are paid by the S corporation’s shareholders. This tax will only apply in situations where the S corporation was formerly a C corporation and liquidates within ten years of making its S election.