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.
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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.
reports a $50,000 capital gain in 2007, but in the absence of other offsetting capital gains in 2008, her $30,000 realized capital loss will be limited to a $3,000 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.
he shareholder consequences of a complete liquidation of an S corporation are governed by Secs. The dividend rules that otherwise apply to corporate distributions are not applicable to distributions in complete liquidation.
Distributions received by the shareholder are treated as payment in full for the exchange of stock. The shareholder recognizes gain when the adjusted basis of each block has been recovered, while loss is not recognized until the corporation has made its final distribution.
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.
302 if the distribution is pursuant to a plan and occurs within the tax year the plan is adopted or the following tax year and the “safe harbor” of Sec. Under the safe harbor, the assets, or proceeds from the sale of the assets, of a trade or business conducted by the S corporation during the previous five-year period must be distributed to the terminating shareholder, and the S corporation must continue conducting a trade or business that it conducted during the same prior five-year period.
A distribution in partial liquidation that does not qualify for sale or exchange treatment will be governed by the usual S corporation distribution rules of Sec. In certain cases, this treatment is preferable to sale or exchange treatment. 1368 treatment, the sale or exchange rules can be easily avoided, for example, by failing to adopt a plan of liquidation or delaying the distribution until two years after the tax year the plan is adopted.
The liquidation process itself does not terminate the company’s S election.