Exam 6: Corporate Liquidating Distributions

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A complete liquidation is defined by Reg.Sec.1.3322(c)as one or a series of distributions made by a liquidating corporation that completely cancels or redeems all of its stock in accordance with a plan of liquidation.A partial liquidation is defined by Sec.302(e)as a distribution that (1)is not essentially equivalent to a dividend (when determined at the corporate level rather than at the shareholder level),and (2)is pursuant to a plan of liquidation and occurs within the tax year in which the plan is adopted or within the succeeding tax year.Generally,a partial liquidation involves the corporation either ceasing to conduct a trade or business (while still continuing to conduct a second trade or business)or contracting its business activities.In either case,the corporation remains in existence after the partially liquidating distribution.
A complete liquidation is taxed under Code Secs.331 and 336.A partial liquidation is taxed under Code Secs.302(b)and 311.The complete liquidation is taxed to the extent the shareholder recognizes a gain or loss,which is computed by comparing the FMV of the property received to the adjusted basis of the stock redeemed.When the shareholder receives a series of liquidating distributions,the distribution is taxed once the FMV of the property received exceeds the adjusted basis of the stock held.All basis is recovered first before the shareholder recognizes any gain.A partial liquidation results in exchange treatment for a noncorporate shareholder under Sec.302(b)(4).A corporate shareholder is eligible for exchange treatment only if the distribution qualifies as an exchange under the stock redemption rules of Secs.302(b)(1)-(b)(3).The shareholder recognizes a loss only when he or she receives the final liquidating distribution.