In addition, double taxation is avoided in a sale of stock. A sale of assets would be taxed at the corporate level, and the distribution of cash would be taxed at the shareholder level. A sale of stock results in tax only at the shareholder level. To defer income on a sale, the installment sales method of income recognition may be used. This method is appropriate when at least one payment is received after the close of the tax year.
Tax is paid only on the ratable profit percentage applied to each year's payment.
Reorganizations Non-recognition of income can, however, sometimes be achieved if the business acquisition or dissolution is accomplished through a reorganization. Types E and F refer to a continuing enterprise and type G only applies to reorganization out of bankruptcy. Such a transaction permits the use of non-voting stock and must meet a test of continuity of interest. Type A is the least well-defined of the three acquisition types. In a type B transaction, an acquisition of stock in exchange for stock, no property may be exchanged in order to achieve tax-free status.