Corporation B has been in business for 18 years. On January 1 of the current yea
ID: 2572830 • Letter: C
Question
Corporation B has been in business for 18 years. On January 1 of the current year, a fire destroyed some of the assets of the corporation, causing a cessation of part of its activities. As a result, B’s president decided on a permanent contraction of the business. On May 31 of the current year, the corporation distributed unused insurance proceeds, recovered as a result of the fire, in exchange for some of its outstanding stock. The distribution consisted of $25,000 in cash. B had earnings and profits of $50,000 prior to the distribution. This distribution will qualify as a partial liquidation.
True
False
Explanation / Answer
Solution :
Yes.
This example of liquidation will qualify under partial Liquidation concept.
As per section 346(a) read with sub paragraph 2 "a distribution resulting from a genuine contraction of the corporate business such as the distribution of unused insurance proceeds recovered as a result of a fire which destroyed part of the business causing a cessation of a part of its activities" will result in partial distribution.
Section 346 says :
This section defines a partial liquidation. If amounts are distributed in partial liquidation such amounts are treated under section 331(a)(2) as received in part or full payment in exchange for the stock. A distribution is treated as in partial liquidation of a corporation if:
(1) The distribution is one of a series of distributions in redemption of all of the stock of the corporation pursuant to a plan of complete liquidation, or
(2) The distribution:
(i) Is not essentially equivalent to a dividend,
(ii) Is in redemption of a part of the stock of the corporation pursuant to a plan, and
(iii) Occurs within the taxable year in which the plan is adopted or within the succeeding taxable year.
however such distribution can be within a taxable year or with in the succeeding taxable year.