A corporation may liquidate by (a) paying off creditors and distributing the remaining assets in kind to the shareholders or (b) selling assets, paying off creditors, and distributing the remaining cash to the shareholders. If the corporation distributes the assets to the shareholders in kind pursuant to a plan of liquidation, it is treated as having sold the assets to the shareholder for fair market value. If the corporation instead sells the assets and distributes the remaining cash to the shareholder, it is taxed on the sale. Likewise, the shareholder is treated as though the shareholders sold their stock to the corporation for the value of the assets or cash received. The shareholder’s basis in property received pursuant to a plan of liquidation is the fair market value of the property at the time of the distribution.  I. Practical in-class study problems facilitate self-discovery of technical tax knowledge along with the development of a variety of professional skills and attitudes.
On the other hand, individual shareholders often prefer that the distribution be treated as a redemption, for three reasons: A distribution qualifies as a stock redemption only if it significantly reduces the interest of the shareholder in the corporation.
Understand the tax consequence of corporate distributions to the distributee shareholders and the distributing corporation.