Section 3: 10–20%T10
Distribution, Redemption, and Liquidation Planning
Exam Insight
How cash leaves an entity determines whether owners face ordinary dividend income, tax-free return of capital, or capital gain, and the AICPA tests your command of E&P ordering, 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.
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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.