For the last 11 years, Zhang Corporation has owned and operated four different trades or businesses. Zhang also owns stock in several corporations that it purchased for investment purposes.
The stock of Zhang is held equally by Sultan, an individual, and by Turquoise Corporation. Sultan and Turquoise each own 1,000 shares in Zhang, purchased 9 years ago at a cost of $200 per share.
Determine whether either of the following independent transactions qualify as partial liquidations under § 302(b)(4). In each transaction, determine the tax consequences to Zhang, to Turquoise, and to Sultan. Zhang holds E & P of $2.1 million on the date of the distribution. Zhang redeems 250 shares from each shareholder.
a. Zhang sells one of its business lines (basis $500,000, fair market value $700,000) and distributes the proceeds equally to Sultan and Turquoise.
b. Zhang equally distributes stock (basis $425,000, fair market value $700,000) that it holds in other corporations to Sultan and Turquoise?