Dividend entry liquidating
However, if the merger is for cash and stock, the target company's stockholders must recognize gain attributed to the transaction to the extent they received cash.
Their basis would be increased by the amount of gain they were taxed on.
A dividend paid to shareholders out of a company's capital or assets, rather than its earned income.
That is, a liquidating dividend occurs when a company pays more than its total profit in dividends.
The former target company stockholders transfer their basis to their new stock, and when they sell their acquiring company stock they will use that figure to calculate their taxable gain or loss.
When you receive a liquidating dividend, the amount will be reported to you on a 1099-DIV form, in either box 8 or 9.
Only the amount that exceeds the taxpayer's basis in the stock is capital; this is taxed as a capital gain.
The result is that the acquirer takes over the target and the former stockholders of the target company now become stockholders in the acquirer.
The former target stockholders get their acquirer stock from a liquidating dividend.