ExpertMedium1 markMultiple Choice
CPA · Question 56 · Area III: Entity Tax Planning
Which entity type allows for a tax-free liquidation of the entity itself (assuming no cash > basis issues)?
Which entity type allows for a tax-free liquidation of the entity itself (assuming no cash > basis issues)?
Answer options:
A.
C Corporation
B.
S Corporation
C.
Partnership
D.
None.
How to approach this question
Compare liquidation rules. Corp liquidation is a taxable sale. Partnership liquidation is generally tax-free (carryover basis) unless cash exceeds basis.
Full Answer
C.Partnership✓ Correct
C
IRC §731. Partnership liquidations are generally tax-free (basis substitution). Corporate liquidations (C or S) trigger gain recognition under §336.
Common mistakes
Thinking S Corp liquidation is tax-free.
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