Liquidating distribution cash proceeds taxed
This may in turn make it difficult to accurately determine the AAA available for ordinary distributions and makes inadvertent dividend distributions from AE&P more likely to occur.If the S corporation has AE&P, the shareholders may want to forgo distributions prior to commencement of the liquidating distributions, because once the AAA is exhausted, preliquidation distributions are treated as dividend income to the extent of AE&P.If the sale and distribution occur in the same year but the sale of the asset results in ordinary income, the shareholder may report some or all of the asset sale as ordinary income, which cannot be offset against a capital loss recognized when the proceeds from the sale are distributed. 38 property) contained a similar exception, but the underlying regulations added that for the exception to apply, the transferee’s basis in the property must be determined by reference to the transferor’s basis (Regs. Thus, liquidation within five years of placing the property in service will result in recapture even if the distributee shareholders continue to conduct the business of the liquidated corporation ( The winners of The Tax Adviser’s 2016 Best Article Award are Edward Schnee, CPA, Ph. reports a ,000 capital gain in 2007, but in the absence of other offsetting capital gains in 2008, her ,000 realized capital loss will be limited to a ,000 capital loss deduction in 2008. 1.465-66(a) specifically states that this rule applies to the liquidation of a partner’s interest and the complete redemption of an S shareholder’s interest.) Losses limited by the passive activity rules are also suspended at the shareholder level and carry forward indefinitely to offset future passive income. The taxable gain from the sale passes through to the shareholders and increases their stock basis, which in turn reduces the gain (or increases the loss) the shareholders recognize from the distribution of the sale proceeds. If the sale and distribution do not occur in the same tax year, a shareholder may report capital gain from the sale of the asset but report a capital loss (which cannot be carried back) in a later year when the sale proceeds are distributed. In a complete liquidation, the shareholder’s basis in the distributed property will be its FMV (rather than by reference to the transferor’s basis). The shareholder’s basis in assets received is their FMV at the time of the distribution.Basis is not affected by the shareholder’s assuming corporate liabilities or receiving corporate property that is subject to a liability (Sec. A distribution in partial liquidation of the S corporation will also qualify for sale or exchange treatment under Sec.
If the shareholder assumes known corporate liabilities or receives corporate property subject to a liability (such as the distribution of mortgaged land), the amount realized is reduced by the amount of the liability (Ford, 311 F2d 951 (Ct. It appears that the adjusted basis of stock held in a liquidating corporation is adjusted for current-year passthrough items prior to determination of gain or loss from the receipt of the liquidating distributions (see Regs. The 2007 distribution is allocated the same as before.
While claimed over a 10-year period, compliance with the statutory criteria must be met over a 15-year “compliance period” (Sec. The LIHC is subject to recapture if any interest in the building (including stock owned in an S corporation that owns the building) is disposed of during the compliance period. Alternatively, the shareholders can pledge Treasury securities in lieu of a surety bond (Rev.
The liquidation of an S corporation that has passed through the LIHC to its shareholders, and the distribution of the low-income housing property (or proceeds from its sale) to the shareholders, appear to result in recapture.
Long-term or short-term classification of a liquidation that qualifies for capital gain treatment depends on the shareholder’s holding period, with long-term status having significant importance due to the 15% tax rate cap on long-term capital gains.
Shareholders in the 35% tax bracket achieve a 57.1% ((35% – 15%) ÷ 35%) tax savings on capital gain versus ordinary income.For example, the low-income housing credit (LIHC) authorized by Sec. A reduction in stock ownership triggers recapture when the shareholder’s interest falls below two-thirds, and then one-third, of what it was in the year the S corporation placed the investment credit property in service (Sec.