Question

Which of the following statements is FALSE?

A. In order for corporate distributions to qualify as a partial liquidation under IRC §302(b)(4), the liquidating distributions must be made pro-rata in accordance with each shareholder's stock ownership percentage.
B. Generally to qualify as a partial liquidation, the distribution must result in a bona fide contraction of the corporate business at the corporate level (not the shareholder level).
C. One safe harbor the taxpayer may rely on to qualify as a partial liquidation is to discontinue one business while simultaneously continuing another trade or business which the corporation had conducted for a period of more than 5 years prior to the date of the stock redemption.
D. A & C are BOTH FALSE.
E. ALL of the above statements are TRUE.

Answer 1

Statement A is FALSE as corporate distributions do not have to be made pro-rata to qualify as a partial liquidation under IRC §302(b)(4), while Statements B and C are TRUE, describing conditions under which a corporate distribution can qualify as a partial liquidation.

Step-by-step explanation:

The question is about the Internal Revenue Code (IRC) §302(b)(4) which pertains to corporate distributions qualifying as a partial liquidation. After analyzing the statements, it is determined that Statement A is FALSE since, for a corporate distribution to qualify as a partial liquidation under IRC §302(b)(4), the distributions do not have to be pro-rata but can be non-proportional provided that the distribution is not essentially equivalent to a dividend, and the corporation undergoes a genuine contraction of its business.

Statements B and C are TRUE. A bona fide contraction of the corporate business at the corporate level, not the shareholder level, is a requirement for a distribution to qualify as a partial liquidation (Statement B). The safe harbor mentioned in Statement C indicates that a taxpayer may qualify as a partial liquidation when discontinuing a business as long as the corporation continues to conduct another trade or business for a period of more than 5 years prior to the redemption of the stock.