As a result, the distribution is not

a complete termination and

therefore Section 302(b)(3) does not apply.

Sunchaser Shakery Corporation made

a distribution to Nicholas in a qualified partial liquidation.

He owns 500 of the 1,000 outstanding shares.

The distribution was in exchange for 250 shares.

After the partial liquidation,

Nicholas own 50 percent of the remaining stock.

At the time of the distribution,

the shares were worth $350 per share and Nicholas had a basis of $100 per share.

Assuming corporate E&P of $800,000 at the time of the distribution,

what are the tax effects of the distribution for Nicholas?

Well, the important thing to remember here is that under a partial liquidation rules,

a non-corporate shareholder receive sale or exchange treatment.

Thus, Nicolas has the same type of calculation as we're used to.

That is we start with amount realized.

And here, he is receiving

$350 times 250 shares or $87,500.

Subtract from that his adjusted basis,

which is $100 per share times the 250 shares is $25,000.

Thus, he has a total capital gain that is both realized and recognized of $62,500.

His basis and the remaining shares

would then be $100 per share.

Sunchaser Shakery Corporation distributed

property in a proportionate redemption of stock in a partial liquidation.

Sunchaser had E&P exceeding the amount of the distribution.

The distribution was made to Orange Corporation,

a 25 percent shareholder.

That distributed property had a $75,000 fair market

value and a $40,000 adjusted basis to Sunchaser.

Orange had an adjusted basis of $25,000 in the stock redeemed by Sunchaser.

What is the effect of the redemption to Orange?

Recall that Section 302(b)(4) allows shareholders to receive redemptions and

partial liquidations to treat the distribution as a payment

for their stock with any gain considered a capital gain.

But the important part here to remember is that 302(b)(4)

only applies to non-corporate shareholders.

Therefore, a corporation, which is what we have here,

that receives a redemption and partial liquidation must treat

the distribution as a dividend to the extent of

E&P unless the distribution qualifies under one of the other redemption sections.

But the distribution here is not a complete termination,

it's not substantially disproportionate,

and it's not essentially equivalent to a dividend.

Thus, Orange has taxable dividend

given the sufficient amount of E&P on hand.

Sunchaser Shakery Corporation has been in business for 18 years.

On January 1 of this year,

a beach fire destroyed some assets causing cessation of part of its operations.

As a result, Nicholas, the president,

decided on a permanent contraction of the business.

On May 31st, Sunchaser distributed unused insurance proceeds of $25,000,

received due to the fire,

in exchange for some of its stock.

Sunchaser had E&P of $50,000 before the distribution.

And we want to know does the distribution qualify as a partial liquidation?

In short, the answer is yes.

Why? Well, if you recall,

Section 302(b)(4) refers to Section 302(e),

which provides that a distribution can qualify as

a partial liquidation if it is not essentially equivalent to a dividend.

However, unlike in Section 302(b)(1),

this issue was tested at the corporate level.

Thus, the distribution meets this requirement if is attributed to

the termination of one of the corporation's businesses.

In other words, a bonafide contraction of corporate business.