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A longstanding question of U.S. corporate taxation has been whether a distribution made close in time to a sale or exchange of corporate stock will be respected as a separate transaction. While this issue most commonly arises in the context of socalled "bootstrap acquisitions,"1 the same issue also can occur in the context of liquidations. If the corporation is in the process of liquidating, it will invariably make one or more distributions to its shareholders. However, if the corporation were to declare and pay an ordinary Section 301 distribution before liquidating, the tax consequences may differ significantly if the dividend is respected as a separate dividend out of earnings and profits (E&P), as opposed to being treated as part of the Section 331 or Section 332 liquidation. In the latter case, the corporation's accumulated E&P may be taxed to the shareholder as capital gain or carry over to the acquiring corporation under Section 381, or in the international context, be included in the U.S. shareholders income under Section 1248 or Section 367(b).2
An actual liquidation effected under state law may involve several steps, including the board and/or shareholders' decisions to sell substantially all of the corporation's assets and liquidate, board and shareholder approval of these actions, the adoption of a formal plan of liquidation as a matter of state law to liquidate, the actual sale of assets, distribution of proceeds, and the filing for a certificate of dissolution. These steps together may span a significant period of time. Further, the first step in the process-the board and shareholders' decision to liquidate the company-is a subjective question of intent that may not be definitively answered by the presence or absence of a resolution of the corporation's minutes to liquidate. Even if it were clearly determinable, the date of the shareholders' decision may not be the relevant date: corporate action/authorization likely is necessary for the corporation to liquidate. In light of all of these potential indicia of liquidation, it may be difficult to identify precisely when a corporation has embarked on the multi-step process of dissolution.
If a pre-liquidation dividend is desired, the uncertain start date of a corporate liquidation may prove unhelpful. A newer, modern question also has entered the picture: does the fact that...