When a company has more liabilities than assets, equity is negative and no liquidating distribution is made at all.This is usually the case in bankruptcy liquidations.Conversely, if it distributes appreciated property it must recognize gain as if it had sold the property to the shareholder for its FMV.
Nonliquidating corporate distributions are distributions of cash and/or property by a continuing corporation to its shareholders.
This mainly occurs during voluntary liquidations of solvent corporations.
Under the Internal Revenue Code of 1954, the corporation is aseparate taxable entity, so that corporate income is taxed to thecorporation and dividends paid by the corporation are taxable to theshareholders.
An investor that is long a stock may decide to sell some or all of the shares held in his portfolio for cash.
Liquidating an asset is carried out when an investor or portfolio manager needs the cash to re-allocate funds or re-balance the portfolio.