Corporate shareholders may prefer that the distribution be treated as a dividend, allowing the corporation to take advantage of the special dividends-received deduction under Code § 243 (which allows the dividends to only be taxed once at the corporate level).On the other hand, individual shareholders often prefer that the distribution be treated as a redemption, for three reasons: A distribution qualifies as a stock redemption only if it significantly reduces the interest of the shareholder in the corporation.How do you wind up and liquidate a company that is factually solvent?
The rules governing distributions from C corporations differ from the rules that apply to distributions from S corporations.The trustee then distributes any remaining assets according to a hierarchy of interest holders.Bond holders and preferred shareholders are paid first if there are any remaining assets. As a practical matter, common shareholders do not receive anything.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.