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Liquidation Rights

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Liquidation rights
The rights of a firm's securityholders in the event the firm liquidates.

Liquidation Rights
The right of certain stakeholders in a firm to receive the proceeds of the firm's liquidation. Liquidation rights vary according to a hierarchy; that is, interested parties higher in the hierarchy have the right to receive all their proceeds before those lower in the hierarchy. Generally speaking, secured creditors have the highest liquidation rights, followed by general creditors, preferred stockholders, and, finally, common stockholders. See also: Bankruptcy.


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If the owner's interest has no dividend, voting or liquidation rights (beyond return of the initial contribution), the IRS may ignore the entity as an owner.
IRC section 2704 treats a lapse of voting or liquidation rights as a taxable gift or bequest.
But if S status is terminated (because preferred stock is involved or the issued and/or exchanged stock's distribution or liquidation rights differ), this exception will not apply.
 
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