Amounts distributed in complete liquidation of a corporation are to be treated as in full payment in exchange for the stock, and the amounts distributed in partial liquidation are to be treated as in part or full payment in exchange for the stock so canceled or redeemed. The phrase “amounts distributed in partial liquidation” means a distribution by a corporation in complete cancellation or redemption of all of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.

The gain or loss to a shareholder from a distribution in liquidation is to be determined by comparing the amount of the distribution with the cost or other basis of the stock. In the case of amounts distributed in partial liquidation, other than a distribution in pursuance of a plan of reorganization as described in ACA 26-51-412, the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of ACA 26-51-411 for the purpose of determining the taxability of subsequent distribution by the corporation.

A taxpayer who has elected to be treated as an S corporation for federal income tax purposes but not for state income tax purposes (therefore retaining its C corporation status), must file a § 338 election with the Department's Individual Income Tax Section stating that it desires to be taxed in accordance with IRC Section 338. This is so despite the fact that the taxpayer may already have a § 338 election on file with the IRS.

If the taxpayer has elected to be treated as an S corporation for both federal and state income tax purposes, and the taxpayer has also filed a § 338 election with the IRS, the taxpayer need not file a separate § 338 election with the Department -- the taxpayer will automatically receive § 338 treatment by the Department for state income tax purposes as well.

If the taxpayer has elected to be treated as a C corporation for both federal and state income tax purposes, and the taxpayer has also filed a § 338 election with the IRS, the taxpayer need not file a separate § 338 election with the Department -- the taxpayer will automatically receive § 338 treatment by the Department for state income tax purposes as well.

Under IRC Sec. 338, certain stock purchases will be treated as asset acquisitions for purposes of income taxation.