, MODULE 36 TAXES: CORPORATE 575

earnings, and share in assets upon liquidation; and after the redemption the shareholder's stock
ownership [both direct and constructive] must not exceed 50%), or
(2) The redemption is substantially disproportionate (i.e., after redemption, shareholder's percent-
age ownership is less than 80% of shareholder's percentage ownership prior to redemption,
and less than 50% of shares outstanding), or
(3) All of the shareholder's stock is redeemed, or
(4) The redemption is from a noncorporate shareholder in a partial liquidation, or
(5) The distribution is a redemption of stock to pay death taxes under Sec .. 303.
2. If none of the above tests are met, the redemption proceeds are treated as an ordinary Sec. 301 dis-
tribution, taxable as a dividend to the extent of the distributing corporation's earnings and profits.
3. A corporation cannot deduct amounts paid or incurred in connection witb a redemption of its
stock

4.
,
Complete liquidations
.
(except for interest expense on loans used to purchase stock).

5. Amounts received by shareholders in liquidation of a corporation are treated as received

in ex-
change for stock, generally resulting in capital gain or loss. Property received will have a basis
equal to FMV. .
6. A liquidating corporation generally recognizes gain or loss on the sale or distribution of
its as-
sets in complete liquidation.
(1) If a distribution, gain or loss is computed as if the distributed property were sold to the distrib-
utee for FMV.
(2) If distributed property is subject to a liability (or a shareholder assumes a liability) in excess of
the basis of the distributed property, FMV is deemed to be not less than the amount of liabil-
ity.
7. Distributions to related persons
(1) No loss is generally recognized to a liquidating corporation on the distribution of property to a
related person if
(a) The distribution is not pro rata, or
(b) The property was acquired by the liquidating corporation during the five-year period end-
ing on the date of distribution in a Sec. 351 traps action or as a contribution to capital.
This includes any property whose basis is determined by reference to the adjusted basis
of
property described in the preceding sentence.
(2) Related person is a shareholder who owns (directly or constructively) more than 50% of the
corporation's stock.
8. Carryover basis property
(1) If a corporation acquires property in a Sec. 351 transaction or as a contribution to capital at
any time after the date that is two years before the date of the adoption of the plan of complete
liquidation, any loss resulting from the property's sale, exchange, or distribution can be recog-
nized only to the extent of the decline in value that occurred subsequent to the date that the
corporation acquired the property .
. (2) The above rule applies only where the loss is not already completely disallowed by c.(1)
above, and is intended to apply where there is no clear and substantial relationship between
the contributed property and the conduct of the corporation's business. If the contributed
property is actually used in the corporation's business, the above rule should not apply if there
is a business purpose for placing the property in the corporation.
EXAMPLE: During September 2007, a shareholder makes a capital contribution ojproperty unrelated to the
corporation's business with a basis oj$15,000 and a FMV oj$1O, 000 on the contribution date. Within two
years the corporation adopts a plan oj liquidation and sells the property jor $8,000. The liquidating
corporation's recognized loss will be limited to $10,000 - $8,000 = $2,000.
9. Liquidation of subsidiary
(1) No gain or loss is recognized to a parent corporation under Sec. 332 on the receipt of prop-
erty in complete liquidation of an 80% or more owned subsidiary. The subsidiary's basis