Related Party Loss Limitation | Disallowed Losses| Corporate Distribution Liquidation | CPA Exam REG

Losses are disallowed on distributions to related parties in either of the following cases:
• The distribution is not pro rata, or
• The property distributed is disqualified property.
3 A corporation and a shareholder are considered related if the shareholder owns (directly or indirectly) more than 50 percent in value of the corporation’s stock.4 A pro rata distribution is a distribution where each shareholder receives his or her proportionate share of the corporate asset distributed. Disqualified property is property that is acquired by the liquidating corporation in a § 351 or contribution to capital transaction during the five-year period ending on the date of the distribution. The related-party loss limitation can apply even if the property was appreciated (fair market value greater than basis) when it was transferred to the corporation.

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