A liquidating distribution (or liquidating dividend) is a type of nondividend distribution made by a corporation or a partnership to its shareholders during its partial or complete liquidation. Liquidating distributions are not paid solely out of the profits of the corporation. Selling or liquidating the operation will likely require owners to input capital for repaying liabilities. The worst consequences of negative retained earnings occur with S corporations. Distributions to S corporation shareholders that create negative equity are taxed as capital gains – unless the shareholder is the source of loans to the. For example, if an S corporation with an April 30 year end makes its final liquidating distribution on October 31, 2007, the shareholders will report 18 months of passthrough items on their 2007 returns. Liquidations and Dissolutions: Critical Tax Implications for Businesses presents Proactive Steps to Minimize Negative Income Tax Consequences A Live 110-Minute Teleconference/Webinar with Interactive Q&A Today's panel features: Mark Schweighofer, Stein Sperling Bennett DeJong Driscoll & Greenfeig, Rockville, Md. Liquidation value is the total worth of a company's physical assets when it goes out of business or if it were to go out of business. Liquidation value is the total worth of a company's physical. The owner's equity at the end of 2012 would be a negative $15,000. The negative amount of owner's equity also means that the company's balance sheet will report liability amounts greater than the amount of assets. Under Sec. 331, a liquidating distribution is considered to be full payment in exchange for the shareholder’s stock, rather than a dividend distribution, to the extent of the corporation’s earnings and profits (E&P). The Debate: Liquidating By Capital Accounts or By Distribution Formula As discussed above, allocations ultimately determine distributions under the substantial economic effect test. To close a S corporation, one must zero out the balance sheet.. I've worked for a lot of S corps, but not one with negative equity. But something seems screwy here. If all the assets are gone and liabilities paid, then you seem to have a negative on the equity side that balances with nothing. You'd either have to have negative assets, which. A liquidating distribution (or liquidating dividend) is a type of nondividend distribution made by a corporation or a partnership to its shareholders during its partial or complete liquidation.