Section 3: 10–20%T10
Distribution, Redemption, and Liquidation Planning
Exam insight
The way cash leaves an entity decides whether owners face ordinary dividend income, a tax-free return of capital, or capital gain, and the AICPA tests your command of E&P ordering, the redemption sale-versus-dividend tests, partnership distribution rules, and corporate liquidations. Planning the character and timing of these payments can swing the tax bill dramatically.
What AICPA wants you to know
- 1Apply the E&P ordering rules to classify a C corp distribution as a dividend, return of capital, or capital gain.
- 2Determine when a stock redemption qualifies for sale (capital gain) treatment versus dividend treatment.
- 3Distinguish nonliquidating from liquidating partnership distributions and the basis consequences of each.
- 4Classify section 736 payments to a retiring partner between 736(a) and 736(b).
- 5Analyze corporate liquidations under sections 331/336 (taxable) and 332/337 (tax-free parent-subsidiary).
- 6Plan to control the character and timing of distributions to minimize tax.
Patterns in this topic
The exam re-skins the same archetypes. Recognize these here, then drill them in the Pattern Lab.
The Distribution and Liquidation PlanCharacter follows the exit path: 351 boot caps formation gain, E&P orders a distribution, and the redemption tests decide sale versus dividend.The Partnership AllocationTrack outside basis the partnership way: add the share of liabilities, run distributions for gain, and carve out 751 hot assets and 736 payments.
Exam tip
Study smarter: before you expand each card, cover the screen and try to recall what the concept means from its title alone. Retrieving it from memory builds the recall the exam actually tests, and it beats re-reading.