Question

Reveille Corporation experienced a complete loss of its lumber mill as a result of a fire. The company received $2 million from the insurance company. Rather than rebuild, Reveille decided to distribute the $2 million to its two shareholders. No stock was exchanged in return. Under what conditions will the distribution meet the requirements necessary to be treated as a partial liquidation and not a dividend? Why does it matter to shareholders?

Answer 1

Answer -

Step - (1) - Facts of the case given -

Reveille Corporation experienced a complete loss of its lumber mill as a result of a fire. The company received $2 million from the insurance company. Rather than rebuild, Reveille decided to distribute the $2 million to its two shareholders. No stock was exchanged in return.

.

Step - ( 2 ) - Analysis and Conclusion -

Conditions under which a Distribution is treated as in Partial liquidation of a corporation if -

• Distribution must either be -
  • Not essentially equivalent to a dividend, or
  • Be the result of the termination of a qualified trade or business.

In the given case, the test likely will be whether the use of the mill constituted a qualified trade or business.

The determination matters to shareholders, because they will receive exchange treatment, if the transaction is a
partial liquidation and a potential dividend if the transaction is viewed not to be a partial liquidation.