What is Partial liquidation?
In short
A distribution in partial liquidation, judged by whether the corporation is genuinely contracting, such as ending a business it has actively run for 5 years, is treated as a sale of stock by noncorporate shareholders, giving capital gain rather than a dividend.
Key takeaways
- The test looks at the corporation, not at changes in each shareholder's ownership.
- Corporate shareholders get dividend treatment instead.
- The distribution must be made under a plan within a set time.
Where it's tested
TCP: Distributions, Redemptions & Liquidations — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A shareholder owns 70% of a corporation's stock. Following a redemption, she owns 52%. Ignoring attribution, does the redemption qualify as substantially disproportionate?