Under IRC Section 302, for a redemption to be treated as a “sale or exchange,” the transaction must meet at least one of the following three tests: (1) the transaction must result in a complete redemption of all of the S corporation stock owned by the selling shareholder (the “complete redemption test”); (2) immediately after the redemption, the selling shareholder must own less than 50% of the total voting power of the company and the percentage of the company’s voting stock owned by the selling shareholder immediately after the redemption must be less than 80% of the company’s total voting stock owned by the shareholder immediately prior to the redemption (the “substantially disproportionate test”); or (3) the redemption is not essentially equivalent to a dividend (the “not essentially equivalent to a dividend test”).
For purposes of these three tests, ownership will include the shareholder’s direct, indirect and constructive ownership of the company’s stock.
The shareholders then must vote on the proposed dissolution at a shareholder meeting.
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas.
607.1406(10), whether such claim is based on an event occurring before or after the effective date of dissolution.
That being said, in order to avoid jeopardizing its S election, the corporation would be well advised to make a corrective distribution (even though that distribution will also be disproportionate) as soon as possible.
Officially ending its existence as a state-registered business entity, and putting it beyond the reach of creditors and other claimants, begins with a formal process called “dissolution.” While a corporation may be involuntarily dissolved through a court order, this article covers voluntary dissolution by a corporation’s shareholders.
Also, while there are streamlined procedures for dissolving corporations that have not yet started doing business, those procedures are not covered in this article.
Constructive ownership is determined based on the “attribution rules” discussed below.
In general, if a selling shareholder transfers 100% of his stock to the company, he will meet one of these tests unless he is deemed to own shares of company stock under the “attribution rules” described below.