Liquidating dividend s corporation
Although a corporation is allowed to recognize tax losses when depreciated property is distributed to shareholders in complete liquidation of the corporation (Sec. At the shareholder level the stock redemption or non-cash distribution can result in a variety of tax consequences: taxable dividends or capital gain taxes. Lets say XYZ Inc (S Corp) has three unrelated shareholders. One in NJ with adjusted cost basis of 5K and one in NY with adjusted cost basis of 7K.
For purposes of these three tests, ownership will include the shareholder’s direct, indirect and constructive ownership of the company’s stock.Answer: This is a commonly misunderstood area of tax law. Section 1.1361-1(l)(1) provide, in part, that “a corporation that has more than one class of stock does not qualify as a small business corporation.” The regulations go on to provide that a corporation is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds.In short, S corporations have more flexibility than you realize to make distributions that are not perfectly pro-rata to its shareholders. Relevant Law: The genesis of the confusion is found in Section 1361(b)(1)(D), which provides that in order for a corporation to be eligible to make an S election, the corporation can only have one class of stock outstanding. As you can see, there is no prohibition on an S corporation having voting and nonvoting stock; rather, it simply can’t have shares of stock that offer the holders different rights to distribution or liquidation proceeds. Here’s the thing; there’s nothing in the statute or regulations that says you can’t make a disproportionate distribution; it simply says that the underlying stock can’t confer upon the shareholders different to distributions.So what happens if a corporation (C Corp or S Corp) distributes property or stock other than cash to a departing shareholder?The corporation will recognized gain (not loss) if the fair market value (FMV) of the property exceeds its adjusted cost basis (Sec. The depreciation recapture of certain capital assets will trigger ordinary income and/or special unrecaptured sec. Basically the non-cash distribution is treated as if the corporation (C Corp or S Corp) had sold that property to the exiting shareholder. Unfortunately, a corporation (C Corp or S Corp) cannot recognize any losses on a distribution of appreciated property (i.e., where the property’s FMV is less than the adjusted cost basis).