Academic journal article Journal of Accountancy

Partial Liquidations

Academic journal article Journal of Accountancy

Partial Liquidations

Article excerpt

Corporate

PARTIAL LIQUIDATIONS

The proclivity of corporations to restructure, together with what is likely to be a reduction in tax rates for capital gain, suggests partial liquidations may regain popularity. A partial liquidation distribution, although resembling a dividend or pro rata stock buyback, is nevertheless treated by the recipient shareholder as a sale or exchange of stock, thus giving rise to a capital gain.

Under IRC section 302(b)(4), two requirements for partial liquidation treatment are

1. That stock be redeemed.

2. That the redemption be in partial liquidation within the meaning of section 302(e). This section imposes a three part test: The distribution must be "not essentially equivalent to a dividend," must occur pursuant to an adopted plan of partial liquidation and must take place within the year of plan adoption or the following year.

Much of the law centers on the "not essentially equivalent to a dividend" test, which is satisfied if the distribution results from a "genuine contraction" of the corporation's business. This contraction occurs if the restructuring transaction yields a 15% or greater reduction in the corporation's gross revenues, net fair value of assets and employees. …

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