The Partial Liquidation Rules Provide a Unique Opportunity for a Corporation

Question

Examlex · Accepted Answer

The Answer is A distribution qualifies as a partial liquidation when it (1) is not essentially equivalent to a dividend and (2) is both pursuant to a plan and made within the plan year or within the succeeding taxable year. A distribution is not essentially equivalent to a dividend if it results in a genuine contraction of the corporation's business or it satisfies the termination of a business test. The genuine contraction of a corporate business requirement is subjective and should be relied upon only after receiving a favorable IRS ruling. The termination of a business test provides an objective safe harbor rule for meeting the not essentially equivalent to a dividend requirement. Under that test, the corporation must satisfy the following requirements:
· The corporation has two or more qualified trades or businesses (i.e., businesses that have been conducted for the 5-year period ending on the date of the distribution and the businesses were not acquired in a taxable transaction during such 5-year period).
· The distribution consists of the assets of a qualified trade or business or the proceeds from the sale of such assets.
· The corporation is actively engaged in the conduct of a qualified trade or business immediately after the distribution.
If there is a stock redemption pursuant to a partial liquidation, the redemption can be pro rata with respect to the shareholders. There is no requirement for an actual redemption of stock in the case of a pro rata distribution.
A partial liquidation results in sale or exchange treatment for noncorporate shareholders. For corporate shareholders, distributions must be tested under the other qualifying stock redemption provisions. Recall, however, that corporate shareholders typically prefer dividend over sale or exchange treatment (due to the availability of the dividends received deduction).

The Partial Liquidation Rules Provide a Unique Opportunity for a Corporation

Definitions: