Question & Answer

Under what circumstances will a liquidating corporation be allowed to recognize a loss in a non-pro rata distribution?

Under what circumstances does a corporate shareholder receive tax deferral in a complete liquidation?

Is it true that a corporation recognizes all gains and losses on liquidating distributions of property to noncorporate shareholders?  Explain.

Do all shareholders receive the same tax treatment in a complete liquidation of a corporation? Explain.

Reveille Corporation experienced a complete loss of its lumber mill as the result of a fire. The company received $2 million from the insurance company. Rather than rebuild, Reveille decided to distribute the $2 million to its two shareholders. No stock was exchanged in return.  Under what conditions will the distribution meet the requirements to be treated as a partial liquidation and not a dividend?  Why does it matter to the shareholders? 

How does the tax treatment of a partial liquidation differ from a stock redemption? 

How does a corporation’s adjustment to earnings and profits differ based on the tax treatment of a stock redemption to the shareholder (i.e., as either a dividend or exchange)? 

What must a shareholder do to waive the family attribution rules in a complete redemption of stock? 

Maria has all of her stock in Mayan Corporation redeemed. Under what conditions will Maria treat the redemption as an exchange and recognize capital gain or loss? 

Ilya and Olga are brother and sister. Ilya owns 200 shares of stock in Parker Corporation. Is Olga deemed to own Ilya’s 200 shares under the family attribution rules that apply to stock redemptions? 

Which members of a family are included in the family attribution rules? Is there any rationale for the family members included in the test? 

Explain why the tax law imposes constructive stock ownership rules on stock redemptions. 

When might a shareholder have to rely on the “not essentially equivalent to a dividend” test in arguing that a stock redemption should be treated as an exchange for tax purposes? 

What are the criteria necessary to meet the “not essentially equivalent to a dividend” change-in-stock-ownership test in a stock redemption? 

What stock ownership tests must be met before a shareholder receives exchange treatment under the substantially disproportionate change-in-stock-ownership test in a stock redemption?  Why is a change-in-stock-ownership test used to determine the tax status of a stock redemption? 

What are the potential tax consequences to a shareholder who participates in a stock redemption? 

In general, what causes a stock distribution to be taxable to the recipient? 

What tax issue arises when a shareholder receives a nontaxable stock distribution? 

Why might a corporation issue a stock distribution to its shareholders? 

A corporation distributes appreciated property to a shareholder. What impact does the distribution have on the corporation’s earnings and profits?

A shareholder receives appreciated noncash property in a corporate distribution and assumes a liability attached to the property. How does this assumption affect the amount of gain the corporation recognizes? From the corporation’s perspective, does it matter if the liability assumed by the shareholder exceeds the property’s gross fair market value? 

A shareholder receives appreciated noncash property in a corporate distribution and assumes a liability attached to the property. How does the assumption affect the amount of dividend the shareholder reports in gross income (assuming adequate E&P)?  

Assuming adequate E&P, will the shareholder’s tax basis in noncash property received equal the amount the shareholder includes in gross income as a dividend (assuming adequate E&P)? Under what circumstances will the amounts be different, if any? 

What income tax issues must a corporation consider before it makes a noncash distribution to a shareholder? 

When a shareholder receives a noncash distribution of property that is encumbered by a liability (the shareholder assumes the liability on the distribution), how does the shareholder determine the amount of the distribution?