Liquidating vs nonliquidating distributions

The consequences of distributions to the shareholders and the corporation are discussed further.

Shareholders in an S corporation must keep careful track of their tax basis.

In essence, the ordering rule allows shareholders to "borrow" basis from anticipated net income at the end of the year while receiving distributions during the taxable year.

Since adjustments to basis are made at the end of the year, the shareholder's basis at the time of the distribution is irrelevant. These rules limiting losses and allowing tax-free distributions up to the amount of the shareholder's adjusted basis are similar in certain respects to the rules governing the treatment of losses and cash distributions by partnerships.

But that section only covers gain on distributions of appreciated property.

If the corporation distributes property that has depreciated (i.e., property with a built-in loss), Code § 311(b) does not apply.

The beginning basis for stock is the amount the shareholder invested to obtain the stock.

Corporate shareholders may prefer that the distribution be treated as a dividend, allowing the corporation to take advantage of the special dividends-received deduction under Code § 243 (which allows the dividends to only be taxed once at the corporate level).

On the other hand, individual shareholders often prefer that the distribution be treated as a redemption, for three reasons: A distribution qualifies as a stock redemption only if it significantly reduces the interest of the shareholder in the corporation.

The beginning basis for debt is the amount the shareholder loaned to the corporation.

Stock Basis Rules Under the proposed regulations, the basis of stock is adjusted in the following order: Increases a.

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