Question

Assume the fire loss and lack of reinvestment of the proceeds resulted in the actual contraction of the business. Discuss whether the transaction would qualify as a partial liquidation and the reasons it would or would not qualify

Answer 1

Partial Liquidation -

In partial liquidation, all the property and assets are not disposed off and the corporate does not wind up all the affairs of the company. In partial liquidation, part of stock is distributed or redeemed and business or affairs of the corporate are contracted.

In the given question, it is stated that due to fire loss and lack of reinvestment of the proceeds, there is actual contraction in the business.

Since, there is contraction, not complete wind up, this is partial liquidation, not complete liquidation. And the proceeds are not reinvested, means that the proceeds are distributed.

Therefore, the given transaction in the question would qualify as partial liquidation.