C Corporation Dissolution

[nnelson1331]

I formed a C-Corporation back in 2015 in Virginia, received a EID with the IRS, no sales (other than a few $ rebates) were ever achieved. But expenses related to Research & Development of future products were incurred.  On 2/28/2023 on the last day of its Fiscal Year we held a Board of Directors meeting and also a Shareholders meeting in which it was decided to dissolve the Corporation and to cease doing business on the same date. This was  due to bleak economic outlook for the business area of the Corporation.  For Schedule K purposes we had no receipts for the final year and had total assets of less than $250,000.  All R&D efforts/labor were performed under the terms of sweat equity.

The questions I have are:

1. The involved company had a registered Service Mark (with the TM office) which we’ll call it, “XYZ Corporation”. Given that to maintain a Trademark or Servicemark you MUST continue to use the SM or TM in commerce which will no longer be true now that the business is closed. Hence the Trademark will become worthless and must be “Abandoned” with the Trademark office.  In closing the company books the trademark therefore cannot be transferred to the shareholder(s) .  How do I handle the loss of trademark value on the final tax return?

1. A fair amount of Shareholder loans were made to the Corporation (separate  from the $1K book value of original shares sold). No other shares were sold subsequently from the initial distribution of stock.  Each year interest due to the shareholders involved was calculated, posted, etc. The remaining “assets” of the Corporation include:

2a. Worthless trademark/Servicemark (per what was posted above).

2b. A few domain names which actually were initially owned by the founder (prior to establishment of XYZ Corporation) who is one of the shareholders)

2c. Some electronic parts (minimum value due to the age of the lead-free solder which is rather limited for uses in assembly of circuit boards).

2d. Some prototype electronic PCBs which have no commercial value.

2e. Intellectual property related to the PCBs which were made but realistically has no commercial value.

It seems like what I should do is to:

1) Just close the “books” of the corporation and submit a final return to the IRS & State via turbotax Business.

2) Just consider the stocks issued worthless by Shareholders have the handle that on their personal taxes under Deductions & Credits tab in the Casualty and Thefts section.

3) If the founder/shareholder decides to sell the domain name(s) which he/she holds the revenue received from that will just be considered income on the personal tax return of the year that they are sold.

Is this correct?

[Mike9241]

1. The involved company had a registered Service Mark (with the TM office) which we’ll call it, “XYZ Corporation”. Given that to maintain a Trademark or Servicemark you MUST continue to use the SM or TM in commerce which will no longer be true now that the business is closed. Hence the Trademark will become worthless and must be “Abandoned” with the Trademark office.  In closing the company books the trademark therefore cannot be transferred to the shareholder(s) .  How do I handle the loss of trademark value on the final tax return?

only out-of-pocket costs paid by the corporation and which were capitalized can be written off as worthless - an ordinary loss

from IRS PUB 535

Loan or capital contribution. You cannot claim a bad debt deduction for a loan you made to a corporation if, based on the facts and circumstances, the loan is actually a contribution to capital.  that's how the shareholders' loans should be treated which means they get a capital loss for money loaned to the Corporation that was not repaid.

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sorry but sweat/equity is not recognized for tax purposes.

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the founding shareholder should take into account the Fair Market Value of assets received in liquidation in determining their capital loss.

[nnelson1331]

Thanks SOO much for helping out! Thinking forward to the required dissolution recordation steps then...

For the Trademark/Servicemark write off? This is merely an entry in the QuickBooks Corporate Books and not even pertinent for the 1120 taxes except for the small amount of actual Out Of Pocket spent in the final year.

For the Item Liquidation, does it matter if the items involved were originally recorded by the Corporation as Research & Development expenses?  Technically on the Company books they ARE NOT kept as assets. Or do I need to (separately from the QuickBooks and Tax Return) arrive at a Fair Market Value of the non capitalized assets?  I presume I would need to record that on Form 4797?   Would I need to also send the Founder a 1099-DIV showing a loss for whatever amount was not exchanged on the Form 4797? 

Thanks in advance for any clarifications you can add!

[RobertB4444 · Accepted solution]

You have zero income and your assets are being disposed of without a loss that can be written off by the partners.  Why are you filing a tax return at all?  

If you decide you must file then your entire return seems to consist of entries in your balance sheet and making sure that the final return box is checked.  

If you decide not to file then you can dissolve the company with your state authorities and file form 966 with the IRS to notify them that your corporation is dissolved.  I recommend this.

Here is a link to form 966.

@nnelson1331