Liquidating and non liquidating distributions

By contrast, liquidating distributions are treated as though the shareholder had sold her S corporation stock to the S corporation in exchange for the distribution from the S corporation. Note: Since the ordinary distribution rules do not apply, the S corporation’s accumulated earnings and profits or accumulated adjustments accounts do not determine the character of the distribution.S corporations with accumulated earnings and profits should take advantage of this distinction by clearly identifying liquidating distributions in the documents authorizing the liquidation.

This means that the normal distribution rules of Section 1368 do not apply to liquidating distributions.To the contrary, when a partnership distributes appreciated property, the general rule is one of  no gain is recognized by the partnership, and instead the gain will be recognized when the distributee partner sells the property.The downside of deferral, however, is that in order to ensure that any gain in the partnership's assets is preserved, a complex set of rules governing the distributee partner's basis in the distributed property is required.The shareholder’s basis is decreased (but not below zero) by the shareholder’s share of the S corporation’s items of loss and deduction, nondeductible expenses (except expenses that are not chargeable to the capital account), depletion deduction for oil and gas property, and distributions to the shareholder that are not made from accumulated earnings and profits.This helps ensure that the shareholder only benefits once from reductions in income earned by the S corporation.

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