Why do companies issue liquidating dividends

Instead, the distribution is governed by the general nonrecognition rule of Code § 311(a), which prevent the corporation from recognizing loss on a transfer of depreciated property. § 302(b)(1), this test is usually used only when the safe harbors of I. Liquidation is a taxable event for both the shareholder and the corporation. Like the “Redemptions Not Equivalent to Dividends” test of I. If you acquired stock in the same corporation in more than one transaction, you own more than one block of stock in the corporation.If you receive distributions from the corporation in complete liquidation, you must divide the distribution among the blocks of stock you own in the following proportion: the number of shares in that block over the total number of shares you own.If the total liquidating distributions you receive are less than the basis of your stock, you may have a capital loss.You can report a capital loss only after you have received the final distribution in liquidation that results in the redemption or cancellation of the stock.After the basis of your stock has been reduced to zero, you must report the liquidating distribution as a capital gain.

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The rules governing distributions from C corporations differ from the rules that apply to distributions from S corporations.

Divide distributions in partial liquidation among that part of the stock that is redeemed in the partial liquidation.

After the basis of a block of stock is reduced to zero, you must report the part of any later distribution for that block as a capital gain.

331, a liquidating distribution is considered to be full payment in exchange for the shareholder’s stock, rather than a dividend distribution, to the extent of the corporation’s earnings and profits (E&P).

The shareholders generally recognize gain (or loss) in an amount equal to the difference between the fair market value (FMV) of the assets received (whether they are cash, other property, or both) and the adjusted basis of the stock surrendered.