Question

Which of the following statements does not describe a tax consequence to shareholders in a complete liquidation?

A. All complete liquidations are taxable to the shareholders.
B. Complete liquidations are taxable to all individual shareholders.
C. Complete liquidations are taxable to all corporate shareholders owning stock of the liquidated corporation representing less than 80% or more of voting power and value.
D. Complete liquidations are tax-deferred to corporate shareholders owning stock of the liquidated corporation representing 80% or more of voting power and value.

Answer 1

Complete liquidations are not always taxable to shareholders; corporate shareholders with 80% or more ownership in the liquidated company can have tax-deferred liquidations, avoiding double taxation.

Step-by-step explanation:

The statement that does not describe a tax consequence to shareholders in a complete liquidation is A. Not all complete liquidations are taxable to the shareholders. Specifically, complete liquidations are tax-deferred to corporate shareholders who own stock of the liquidated corporation representing 80% or more of voting power and value. This is meant to avoid double taxation, where the corporation is taxed for its capital gains from liquidation and then shareholders are also taxed on those proceeds. Shareholders in a corporation generally have limited liability, which does not extend beyond the amount they have invested. Moreover, corporations are often subjected to a variety of taxes like property tax, payroll tax, excise tax, etc., similar to other taxpayers.