How do I dissolve or disband my club?
Starting with the 2005 tax printer, we were able to offer the option to file a short year return to clubs using Club Accounting 3 and Club Accounting Online. If the club disbands during the year, the previous year's tax printer can be used to create final tax forms. Once you have followed the disbanding directions below, run the Tax Printer. It will detect that the club has dissolved, and will prepare final returns for the period starting January 1, of the year the club is disbanding, and ending with the date that operations ceased. Note - you will have to insert the beginning and ending dates on all schedules produced by the Tax Printer.
Choose your closing date:
While there is not a specific date during the year when these forms can no longer be used, there are some guidelines set by the IRS about clubs who consider closing early
IF THE CURRENT TAX YEAR FORMS WILL BE AVAILABLE BY THE DEADLINE TO FILE THE SHORT-YEAR RETURN, A PARTNERSHIP IS REQUIRED TO USE THE CURRENT YEAR YEAR FORMS.
Our accounting advisor offers the following advice on what this means for clubs.
-If a club disbands in December, their deadline is March 15 of the following year. Tax forms should ALWAYS be available by then so these clubs should always wait to use the new forms.
-A November dissolution has a deadline of February 15. Forms are usually ready by mid January to early February. These clubs should wait for the new forms to file their returns.
-An October dissolution has a deadline of January 15. Most years forms will be available by this date. If large tax law changes are enacted, forms may not be available by Feb 15. While this is uncommon, it has happened in the past.
Based on this, we recommend that clubs considering disbanding in the last quarter should wait until the new year to file, and use the forms for that year. To be safe, those dissolving in October can file for a 5 month extension using form 7004 to anticipate the event the 1065 forms are not ready by Feb 15.
Two other things to keep in mind:
1.) File in a timely manner; better to file on time and need to make a correction, than file late and hope nobody notices.
2.) If the tax law changes, a dissolving partnership must follow the law in effect for the year they dissolve no matter which forms they use.
For example, a club dissolving in April 2010 would need to use 2010 law even if using the 2009 forms. Significant law changes can be a problem for customers using the previous year tax printer to file their final return. This is because that tax printer will not include the tax law changes needed to file an accurate return for the following year.
One example is the split of dividends into qualifying and non-qualifying. Clubs with some history will also remember the splitting of capital gains into 3 categories one year (long-term, medium-term and short-term) and a year or so later back to the current 2 categories.
In those cases, the previous year's tax printer would NOT produce an accurate final return for a dissolved club on the previous year's forms.
Before completing a short year return, be sure that you have have all income from your club's holdings (Especially any dividends, or account interest). If you do not, you may end up getting a dividend or other income after you've already disbanded the club and handed out the checks. If this happens, you technically must re-run disbanding the club, change how much you paid everyone out, and refile. Your club is officially disbanded when you cut the checks, not when the vote takes place.
Keeping the above information in mind, there are two ways to dissolve the club and distribute the proceeds among club members; the "Cash Only" method and the "Cash and Stock Transfer" method. If there are gains on some of your unsold shares, there may be tax advantages to the Cash and Stock Transfer method; please consult your tax adviser. Please be advised that after you disband your club the IRS requires you to file your final tax return by the 15th day of the 3rd month after operations have ceased. The return will cover the period from the start of the year up to the date that operations ceased.
Keep an eye out for when dividends will be issued:
Clubs should also be aware of when dividends will be issued, to avoid suddenly receiving cash or shares because they held a security past the ex-dividend date.
For myICLUB members, the club can simply go to the Calendar tab. Make sure the Portfolio box is selected, and myICLUB will show upcoming ex-dividend and payment dates. This can still take some figuring, as companies are under no obligation to make sure their ex-dividend and payment dates all line up conveniently for clubs.
In this example, it might look like the last week of July would be a good time to close, but the ABBV ex-dividend date from the 12th doesn't pay out until mid-August, at which point it overlaps with an ex-dividend date from another company the club holds. For this club, the earliest date to avoid any surprise dividends is actually the second week of September.
Cash only, or Cash and Shares:
Once the club has a reasonable date chosen, it's time to decide whether any of the withdrawals will include transferring shares to members. While selling all of the club's shares and giving members the cash is usually the quickest option, it's also the one most likely to generate capital gains that members will be responsible for paying taxes on, when they file their personal returns.
The following steps assume that the club will be transferring at least some shares to members. If that is not the case, Skip down to the "Cash Only" withdrawal steps.
Sell stocks that would generate a loss, and that nobody is interested in:
First check if there are any stocks that the club could sell for a loss. The easiest way to check this is by going to Accounting > Members, and clicking the withdrawal calculator link. Choose any member, and click the Calculate button. The site will show stocks suggested for transfer to the member, and then stocks which would generate a capital loss.
Next, check if there are securities that nobody in the club is interested in. For example, the club might hold a penny stock like Charlotte's Web (CWBHF). While selling it might generate a capital gain, it might be better to do that instead of having members feel that they have been forced to take shares of a company they don't want.
Confirm broker policy for transferring shares:
Some of the more common issues we have seen in the past:
- The broker may only transfer to members who already have a personal account with the broker.
- The broker may charge a fee to transfer shares to another broker.
- If all members are transferring shares, and there will be no cash-only withdrawals, enter an expense to account for this fee, before entering any withdrawals.
- If one or more members will be taking cash-only withdrawals, brokerage charges can be entered separately as part of each withdrawal.
- The broker may only transfer whole shares.
- If so, sell any fractional shares before starting to work on member withdrawals
How many shares of each company will each member receive:
There are two general methods we see for doing this:
- Have members select the stocks they are most interested in. This can help avoid members receiving stocks they aren't interested in, and may also help cut down on the number of stock transfer requests. If it turns out nobody wants Valero Energy for example, then the club can sell off such shares. This can be a somewhat time consuming process though, so it may not be for everyone.
- Divide up each company among all of the members, based on their % of ownership. This makes more work for the treasurer who has to figure out how many shares of each company should go to each member, and may end up with members receiving companies they have no interest in. Aside from the time needed to figure out how many shares to give each member however, this method can certainly be less stressful than the previous one.
Entering the withdrawals, with a mix of cash+stock and cash-only withdrawals:
- Record all final transactions; this includes dividends, income, expenses, and any final stock sales of shares that are not being given to members.
- Enter a New Valuation. Use a date after the last transaction entered, from step 1.
- Withdraw all members who are receiving shares of stock. Include any broker charges as withdrawal fees.
- Remember, if there are no cash-only withdrawals, any charges by the brokerage should be entered as expenses, in step 1, above.
- Our accounting system will not accept two cash+stock withdrawals that have the same announcement date. You can enter multiple withdrawals in a single sitting, but each withdrawal with a stock transfer must have its own announcement date; don't be afraid to enter withdrawals for a future date, from when you are sitting down to make the entries. Make sure that for each withdrawal, the payout and announcement dates match one another. Assuming that the shares being given, will not 100% match member values, the withdrawals will also show any cash due, to make up the difference between stock value and member value.
- If for any reason the club has any shares left over at the brokerage after these withdrawals, sell those shares the day after the last withdrawal.
- Create a new cash-only valuation dated at least one day after the last cash+stock withdrawal from step 4 or 4.1.
- At least one day after the valuation from step 5, enter the cash only withdrawals. Do NOT charge any withdrawal fees. These withdrawals can all have the same date, one day later than the valuation in step 5.
- The payout date should be the same as the Announcement/Transaction date, for all of the Cash Only withdrawals.
- Once the final withdrawals are complete, print all members Withdrawal Distribution Reports.
In the example below, all of the withdrawals will be entered as close together as possible. Entering the withdrawals this way is not a requirement; if the club wants to wait a day or two between steps, that is OK. The important part, as outlined in the steps above, is making sure that the valuations and withdrawals do not overlap.
To help illustrate the steps described previously, imagine a club with ten members where half want just cash, and half want some shares in addition to cash.
The club has entered all final transactions as of Friday of a given week. This includes any final stock sales of shares that are not being given to members.
The treasurer sits down Saturday, and creates a new valuation. It's ok if this is not a business day. The important part about the valuation is that it sets values that everyone agrees to abide by.
On Sunday (again, it's OK if this is not a business day) the treasurer starts working on the withdrawals for members who want shares of stock. The withdrawal asks for two dates; use Sunday for both of them, on this first withdrawal. Now, each Cash + Stock withdrawal must have a date to itself, so the next withdrawal is dated Monday. Because the two dates on a final withdrawal need to match one another, the treasurer enters Monday as both the Announcement/Transaction date, and the Payout date. This trend continues for each Cash and Stock withdrawal. With five of these withdrawals to enter, the final one will be dated Thursday.
NOTE: While each Cash + Stock withdrawal must have a date to itself, the treasurer is not restricted to entering only one withdrawal per day. In the example here, the treasurer could absolutely sit down on a Sunday, and enter withdrawals for days later in the week. The only thing to keep in mind is that the accounting system will not show the Stock or Cash removed for a particular withdrawal, until the date of the withdrawal arrives. If the treasurer enters a withdrawal dated for Tuesday that takes 5 shares of Apple, those shares will not be deducted from the club record until Tuesday.
Once all of the Stock withdrawals are complete, the treasurer will enter a new valuation on Friday. This valuation will be only for the remaining cash in the club, so the time of day the valuation is created, is not important.
The next day, Saturday, the treasurer can then enter the withdrawals for all of the members who want only cash. Cash-only withdrawals can all share the same date, so it's OK to enter them all on Saturday.
If, for any reason, the club receives money after the withdrawals have been entered, please see FAQ 473 at: https://www.iclub.com/faq/Home/Article?id=473
Once the withdrawals have been entered, you can skip down to the section on producing the final forms.
NOTE ON CAPITAL GAINS WHEN TRANSFERRING STOCK TO A MEMBER
Assuming a member eventually sells any stock that was transferred to them, their capital gain amount will be based on an adjusted basis, determined in part by the value of the stock used when calculating their withdrawal, not the capital gain based on the club's original purchase price. For a more in-depth explanation of the adjustments done at the time of withdrawal, please see https://www.iclub.com/faq/Home/Article?id=414
Whether the gain is considered Long or Short term however is determined by the date the club originally acquired the stock; not the withdrawal or transfer date
Some brokers may not be familiar with partnership regulations, so if you transfer stock, make CERTAIN to remind the members to hold on to their withdrawal reports. When it comes time to record capital gains, whoever prepares the taxes for the member will want to use the information on the withdrawal report to make sure the amount and term of the capital gains are reported correctly to the IRS.
If the club uses the Tax Printer software, and you have followed the NOTE at the beginning of this email, print the club's 1065 and K-1's for all the members for the final year, using the Tax Printer for the prior year. Make sure to check the "final return" box on Form 1065 manually.
1. Sell all Securities.
2. Enter all "Sell" transactions into Club Accounting.
3. Record all final transactions; this includes dividends, income, expenses, etc. We strongly suggest to check the dividend schedule for your stocks, so that you do not end up in a situation where the club receives a dividend after all checks are sent out.
4. Enter a valuation for the day after all transactions have been entered.
5. Print a Member Status Report on the last valuation date.
6. Withdraw all members one day after the last valuation date. Do NOT charge any withdrawal fees. Since this is a final withdrawal, make the Payout date the same as the Announcement/Transaction date.
7. Print the Withdrawal Distribution Reports.
If, for any reason, the club receives money after the withdrawals have been entered, please see FAQ 473 at: https://www.iclub.com/faq/Home/Article?id=473
To process your final tax return you should print and keep copies of the following reports:
* The withdrawal distribution report for each member
* A copy of the valuation statement that was used to disband the club
* A copy of the Income and Expense report and the Balance Sheet
* A copy of the Transaction Report for the entire year to date.
* A copy of each members Individual Valuation Units Ledger from the time each member joined the club.
* A copy of the Security Transactions History or Individual Security Ledger, for each stock that you sold or distributed to members.
The IRS currently requires you to file your final form 1065, K and K-1 forms by the 15th day of the 3rd month following the date operations ceased.
- Before producing the final tax return, go to Accounting > Utilities > Allocate income and expenses, and perform an allocation for the current year.
- Click on the Taxes tab, and click the Go button.
- If you are closing the club after the middle of the year, the web site may already be updated in preparation for the coming year's taxes. In that case, check near the bottom of the page for a link to access archived tax returns, and click it.
- The page that comes up will show a reminder that you are using tax forms for a previous year, and should not use them to file returns for the current year. This only applies in cases where the club is not closing, so you are OK to continue, by clicking the GO button.
- If you have not previously used the tax printer to generate forms, the printer will begin the process to generate the club's final forms, otherwise scroll down near the bottom of the page, and click the Regenerate button.
- If you are using a prior year's tax printer (if the club closed in 2020 but you are using the 2019 printer, for example), you will find a check-box noting that the club has closed. Make sure to put a check-mark in that box, so that the tax printer will only include tansactions for the current year. If you are closing the club early in the year, the check-box may still refer to the club having closed last year, instead of the current year; go ahead and put a ceck-mark in the box regardless.
- If your club closed in a prior year (late in 2019 and you are using the 2019 tax printer) you do not need to make any selection in the tax printer for a final return.
- When filling out the tax printer, you will be asked to enter cost basis information for all stocks sold during the year. If your broker can provide information that would normally appear on the 1099 at the end of the year, go ahead and use that information. If not, we suggest to fill in the cost basis figures calculated by the accounting system. The 'Basis not reported', and 'No 1099 received' options should only be used if your broker can verify ahead of time what information will not appear, or not be reported on the 1099. If there is any doubt, fill in the cost basis information from the accounting system.
- When the tax forms have been generated, you will be returned to the page that shows up after clicking the Go button; the forms available to download will look the same, except that they will only include information from January of the year the club dissolved, up to the club closing date, as well as including a check-mark in the 'Final Return' box for the 1065, and each member K1 form.
- If you are using e-file, scroll down near the bottom of the page, and click the E-File Short Return button. When you e-file the information sent to the IRS includes the dates the club was active from the 1st of the current year, until the date of the final withdrawal.
- If you choose instead to print and mail in the forms, you will need to fill in the date fields at the top of the 1065, K-1 and other forms, to reflect that the club was in operation from January 1st, until whatever date the withdrawal checks were cut for the members.
What to keep after the club closes
The treasurer (or other officer of the club) should keep the following:
- Keep tax-related records a minimum of 3 years, but preferably 7.
- If there are any years when the club did NOT file a 1065, records for those years should be kept forever.
- Copies of tax returns should also be kept forever.
This list is based on our reading of the following IRS web site: