Selling a business can be a monumental milestone, whether you’re cashing out after years of hard work or pivoting to new ventures. But amid the excitement of negotiations and deal closures, one often-overlooked IRS requirement can make or break your tax strategy: Form 966. This unassuming form plays a pivotal role in corporate dissolutions or liquidations following a business sale, ensuring compliance while potentially unlocking tax efficiencies. In this post, we’ll dive into what Form 966 is, when to use it in sale transactions, and how it can safeguard your financial exit.

What is IRS Form 966?

At its core, IRS Form 966, titled “Corporate Dissolution or Liquidation,” is a notification tool for the IRS. Corporations (including farmers’ cooperatives) must file it when they adopt a resolution or plan to dissolve the entity or liquidate any of its stock. It’s not a tax return itself but a mandatory report under Internal Revenue Code (IRC) Section 6043(a), alerting the IRS to the wind-down process.

The form requires basic details like the corporation’s name, EIN, incorporation date and place, type of liquidation (complete or partial), and the date the plan was adopted. You must attach a certified copy of the resolution or plan, and if amended, file a new form. Filing is due within 30 days of adopting the plan, and it’s submitted to the IRS service center where the corporation files its income tax returns. Penalties for non-filing can reach up to $10,000 under IRC Section 6652(f), so timeliness is key.

Why Form 966 Matters in Business Sale Transactions

Business sales typically fall into two categories: stock sales (where buyers acquire shares) or asset sales (where specific assets like equipment, inventory, or goodwill are transferred). Form 966 shines in asset sale scenarios, especially for C corporations, where the sale often leaves the entity as an empty shell ready for liquidation.

After an asset sale, the corporation recognizes gains taxed at the flat 21% federal rate. The net proceeds are then distributed to shareholders. Without liquidation, these might be treated as dividends, leading to double taxation. But by adopting a formal liquidation plan and filing Form 966, distributions qualify as a sale or exchange of stock under IRC Section 331, allowing shareholders to offset their basis and pay capital gains rates (0%, 15%, or 20%, plus 3.8% NIIT if applicable) on the excess. This can yield significant savings—potentially 20-30% on the basis portion—compared to dividend treatment.

For example, in a $2.4 million asset sale with zero basis assets, the corporation pays about $504,000 in taxes, leaving $1.896 million. With liquidation via Form 966 and a $1.2 million shareholder basis, the taxable gain drops to $696,000, saving around $285,000 versus non-liquidating distributions. It’s also essential for S corporations in certain closures, though they might use different forms for elections.

Form 966 isn’t required for “deemed” liquidations (e.g., under Section 338 elections) or exempt organizations, but it’s crucial for standard C corp asset sales followed by dissolution.

 

Step-by-Step: Integrating Form 966 into Your Sale

1. Close the Sale: Finalize the APA, allocate the price (report on Form 8594), and pay corporate taxes on gains.
2. Adopt a Plan: Hold a board/shareholder meeting to approve a resolution for complete liquidation, detailing asset distributions and timelines (ideally within 12 months for IRC Section 337 benefits).
3. File Form 966: Submit within 30 days, attaching the plan. No fee, but coordinate with your CPA.
4. Wind Down: Pay debts, distribute proceeds, file final returns (Form 1120 marked “final”), and issue K-1s.
5. State Filings: File articles of dissolution (e.g., Texas Form 651 with tax clearance).

Consult professionals to avoid pitfalls—non-filing can trigger audits, and improper timing might lose tax advantages.

Real-World Example: A Tech Startup’s Exit

Imagine a C corp tech startup sells its assets for $5 million. Post-taxes, $4 million remains. With Form 966-filed liquidation, shareholders with $2 million basis pay capital gains on $2 million, saving big versus dividends. This clean closure eliminates ongoing franchise taxes and liabilities.

Final Thoughts

IRS Form 966 might seem like bureaucratic red tape, but in business sale transactions, it’s a strategic ally for tax optimization and compliance. Whether you’re a small business owner or advisor, integrating it post-asset sale can streamline your exit and preserve more proceeds. Always work with a tax expert to tailor this to your situation—rules evolve, and precision pays off. Contact the experienced attorneys at Prestige Law Group at (888) 517-4575 or (972) 712-1515 to discuss this significant tax savings strategy.

Contact Us

For more information or to schedule a consultation, please contact our office at:

Prestige Law Group, PLLC
Darryl V. Pratt, JD, CPA
Phone: (888) 517-4575
Phone: (972) 712-1515
Email: dpratt@prattlawgroup.com
Address: 2591 Dallas Parkway, Suite 300, Frisco, TX 75034
Website: www.TexasEstates.com