Liquidating distribution to shareholders

A major difference between partnerships and S corpo­rations involves the treatment of distributions of ap­preciated property.

With respect to the timing of gain recognition from such distributions, the rules applicable to partnerships (unlike those applicable to S corporations) generally permit gain deferral.

However, Section 1374 may impose a corporate-level tax on "built-in gains" on property dispositions by corporations that convert from C to S status after 1986 (unless the exception for certain small corporations con­verting to S status before 1989 applies).

Section 1375 may impose a corporate-level tax on passive investment income, which includes gains on some distributed appreciated property, if the corporation has accumulated earnings and profits. X, an S corporation, has earnings and profits of 0,000 and an accumulated adjustments account of ,000.

However, this recapture occurs at the shareholder level only if the Section 38 property was acquired while the corporation was operating under the S election.

Section 1371(d)(2) states that the S corporation is liable for the ITC recapture if the Section 38 property was acquired while the corpora­tion was a C corporation.

There are subtle (and some not so subtle) differences between the two entities from a tax perspective as well.

As with partnerships, an S corporation`s taxable gains usually pass through to its owners and avoid double taxation.Basis adjustments to shareholders` stock are determined under Section 1367(a). If X distributes undivided interests in appreciated property worth ,000 (with a basis of ,000) pro rata to its four 25 percent shareholders. The four shareholders each receive a basis in the distributed property of ,500.The gain recognized by the S corporation passes through to the shareholders and increases the bases of their corporate stock. Assuming no other gain or loss recognition by X for the year, its accumulated adjustments account is increased from ,000 to ,000 and decreased by the ,000 dis­tribution to net out at

As with partnerships, an S corporation`s taxable gains usually pass through to its owners and avoid double taxation.Basis adjustments to shareholders` stock are determined under Section 1367(a). If X distributes undivided interests in appreciated property worth ,000 (with a basis of ,000) pro rata to its four 25 percent shareholders. The four shareholders each receive a basis in the distributed property of ,500.The gain recognized by the S corporation passes through to the shareholders and increases the bases of their corporate stock. Assuming no other gain or loss recognition by X for the year, its accumulated adjustments account is increased from ,000 to ,000 and decreased by the ,000 dis­tribution to net out at [[

As with partnerships, an S corporation`s taxable gains usually pass through to its owners and avoid double taxation.

Basis adjustments to shareholders` stock are determined under Section 1367(a). If X distributes undivided interests in appreciated property worth $50,000 (with a basis of $10,000) pro rata to its four 25 percent shareholders. The four shareholders each receive a basis in the distributed property of $12,500.

The gain recognized by the S corporation passes through to the shareholders and increases the bases of their corporate stock. Assuming no other gain or loss recognition by X for the year, its accumulated adjustments account is increased from $10,000 to $50,000 and decreased by the $50,000 dis­tribution to net out at $0 at year-end.

Section 311(b)(2) mandates that the fair market value of the property for determination of gain recognition by the corporation is not less than the amount of any corporate liability assumed by the distributee in connection with the distribution.

Gain Characterization and Basis Implications The character of the S corporation`s gain passes through to its shareholders under Section 1366(b).

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As with partnerships, an S corporation`s taxable gains usually pass through to its owners and avoid double taxation.Basis adjustments to shareholders` stock are determined under Section 1367(a). If X distributes undivided interests in appreciated property worth $50,000 (with a basis of $10,000) pro rata to its four 25 percent shareholders. The four shareholders each receive a basis in the distributed property of $12,500.The gain recognized by the S corporation passes through to the shareholders and increases the bases of their corporate stock. Assuming no other gain or loss recognition by X for the year, its accumulated adjustments account is increased from $10,000 to $50,000 and decreased by the $50,000 dis­tribution to net out at $0 at year-end.Section 311(b)(2) mandates that the fair market value of the property for determination of gain recognition by the corporation is not less than the amount of any corporate liability assumed by the distributee in connection with the distribution.Gain Characterization and Basis Implications The character of the S corporation`s gain passes through to its shareholders under Section 1366(b).

]] at year-end.Section 311(b)(2) mandates that the fair market value of the property for determination of gain recognition by the corporation is not less than the amount of any corporate liability assumed by the distributee in connection with the distribution.Gain Characterization and Basis Implications The character of the S corporation`s gain passes through to its shareholders under Section 1366(b).

at year-end.Section 311(b)(2) mandates that the fair market value of the property for determination of gain recognition by the corporation is not less than the amount of any corporate liability assumed by the distributee in connection with the distribution.Gain Characterization and Basis Implications The character of the S corporation`s gain passes through to its shareholders under Section 1366(b).

Liquidating distribution to shareholders