Advanced entity taxation
The Distribution and Liquidation Plan
Character follows the exit path: 351 boot caps formation gain, E&P orders a distribution, and the redemption tests decide sale versus dividend.
How the exam words it
- -The stem forms a corporation with boot and asks the recognized gain, testing the lesser of boot or realized gain under section 351.
- -It gives current and accumulated E&P, basis, and a distribution and asks the dividend, return of capital, and gain split.
- -It gives shares before and after a redemption and asks whether it is substantially disproportionate, applying section 318 attribution.
- -It liquidates a corporation and asks whether it is taxable (331/336) or a tax-free parent-subsidiary liquidation (332/337).
The playbook
- 1On a section 351 formation, recognize gain equal to the lesser of boot received or realized gain, never the full realized gain, when transferors hold 80 percent control.
- 2Order a C corporation distribution as a dividend to combined E&P, then a tax-free return of capital to basis, then capital gain.
- 3Test a redemption for sale treatment: substantially disproportionate needs under 50 percent voting and under 80 percent of the prior percentage, both prongs, with section 318 attribution.
- 4Make a parent-subsidiary liquidation tax-free under sections 332 and 337 only when the parent owns at least 80 percent, with carryover basis.
The trap
Recognizing the full realized gain on a 351 formation, or calling a redemption a sale when only one disproportionate prong is met. Gain is capped at boot, and both prongs must be satisfied.
How the exam varies it
The same pattern, re-skinned along these axes:
Section 351 boot gain versus full realized gainE&P ordering of a distribution into dividend, return of capital, and gainRedemption sale-versus-dividend tests versus 332 parent-subsidiary liquidation
Drill this pattern
8 questions of The Distribution and Liquidation Plan from across the AUD topics. Clear it by getting 5 right with a streak of 3.